English final cover-papersB&W

General inquiries regarding the 2005 Ontario Budget: Budget Papers should be directed to:Ministry of Finance Information CentreToll-free English & French inquiries 1-800-337-7222Teletypewriter (TTY) 1-800-263-7776

For electronic copies of this document, visit our Web site atwww.ontariobudget.fin.gov.on.ca

Printed copies are available free from:Publications Ontario880 Bay Street, Toronto, Ontario M7A 1N8Telephone: (416) 326-5300Toll-free: 1-800-668-9938TTY Toll-free: 1-800-268-7095Web site: www.publications.gov.on.ca

© Queen’s Printer for Ontario, 2005ISBN 0-7794-7946-7

Ce document est disponible en français sous le titre :Budget de l’Ontario 2005 – Documents budgétaires

Table of Contents

A INVESTING IN PEOPLE—MANAGING ONTARIO’S FINANCES . . . . . . . . . . . . . 1Details on Ontario’s Finances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49Transparency and Accountability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

B ACHIEVING OUR POTENTIAL: PROGRESS TOWARDS A NEW GENERATION OF ECONOMIC GROWTH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91Ontario’s Economic Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127

C DETAILS OF REVENUE MEASURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151

D REPORT ON BORROWING AND DEBT MANAGEMENT . . . . . . . . . . . . . . . . 163

PAPER AInvesting in People—Managing Ontario’s Finances

The Plan for 2005

2 2005 Ontario Budget

Paper A: Investing in People—Managing Ontario’s Finances 3

Introduction

STRENGTHENING ONTARIO BY INVESTING IN PEOPLEThe 2005 Budget strengthens the province by investing in people while continuing to bring disciplineto the management of their hard-earned tax dollars. The government is continuing to make keyinvestments in Ontarians’ education and skills, health and prosperity. In particular, the Budget features$6.2 billion in cumulative new investments in postsecondary education, including $683 million in2005-06, rising to $1.6 billion by 2009-10. Education is the single most important investmentrequired to build a strong economy in the 21st century. Only jurisdictions with highly educated, skilledand innovative people will attract investments and value-added jobs.

The deficit has been reduced by $2.5 billion, from $5.5 billion in 2003-04 to $3.0 billion in 2004-05.The Province’s plan, which includes historic and long-term investments in postsecondary education, isto eliminate the deficit no later than 2008-09. A balanced budget will be achieved one year earlier, ifthe reserve is not required in 2007-08.

The 2004 Budget introduced a new approach: Budgeting for Results. Ontarians know, andunderstand, that increased spending alone does not guarantee better results. That is why thegovernment constantly reviews the programs it funds against the results they deliver. The governmentis also reporting regularly on its progress towards achieving expected results, so that Ontarians knowwhat they are getting in return for their investments in education, health care and a strong economy.

This Budget builds on the plan laid out in the 2004 Ontario Budget. It builds on the progress that hasbeen achieved for people through that plan. The government is getting results. For example, classsizes in Ontario’s schools are getting smaller in the early grades and test scores are going up.Ontarians have improved access to better health care, through: the approval of 52 Family HealthTeams and three networks of Family Health Teams; the upgrade of seven MRI and 27 CT scanners; anadditional 5,380 surgical procedures, including 1,700 cancer surgeries; and a record $1.3 billioninvestment in home care in 2004-05. A total of 108,000 new jobs have been created over the past year,substantial investments have been made in the province’s infrastructure, and the Ontario AutomotiveInvestment Strategy is being successfully used to leverage billions of dollars in new investment in oneof Ontario’s most important sectors.

The plan is working. Real progress is being made in overcoming both of the deficits that wereinherited by this government: the largest fiscal deficit since 1996-97 and the severe deficit in thequality of the public services valued most by Ontarians. There is reason for hope and optimism, but noroom for complacency. Much work remains to be done. This Budget is the foundation for that work. Itrepresents the next phase in the plan to ensure that Ontario is the place to be, for years to come.


A STRONG FISCAL FOUNDATION: REDUCING THE DEFICITA strong fiscal foundation is essential to Ontario’s prosperity. Ever-increasing deficits threaten theviability of the public services Ontarians deserve, from the schools that educate their children to thehome care that seniors depend upon. In addition, it is unfair to saddle the next generation with the costof today’s consumption.

But prior to the government assuming office, there were several years during which Provincialprogram spending grew much faster than the rate of growth in taxation revenue. In fact, between2000-01 and 2003-04, Provincial program spending increased by 21 per cent, while taxation revenueactually declined by 0.7 per cent. This imbalance between the growth in Provincial program spendingand taxation revenue created the conditions for a structural deficit that resulted in a deterioration of theProvince’s finances. In October 2003, an independent review of the Province’s finances by formerProvincial Auditor Erik Peters concluded that the newly elected government was inheriting asignificant deficit for 2003-04, which has since been confirmed to be $5.5 billion.

The 2004 Budget outlined the government’s plan to eliminate the deficit and ensure responsible fiscalmanagement of the Province’s finances. This Budget provides an update on the Province’s progressand outlines the next phase of the plan.

An important part of that plan is to modernize the way in which government operates and deliverspublic services in Ontario. The 2004 Budget announced the government’s intention to undertake arigorous review of all government programs to ensure they are being delivered in a cost-effective andefficient manner, and to find savings of $750 million in 2007-08. The government has alreadyidentified over half of this savings target. As more than 80 per cent of Provincial program spending isin the form of transfer payments to individuals and organizations such as the government’s broaderpublic-sector (BPS) partners, modernization efforts are being pursued across the entire BPS to makemore efficient use of public tax dollars.

The interim outlook for 2004-05 forecasts a deficit of $3.0 billion—a $2.5 billion reduction from theprevious year, and an in-year improvement of $3.1 billion from the $6.1 billion deficit projected for2004-05 in the 2004 Budget.

The government’s medium-term fiscal plan aims to reduce the Provincial deficit from the $5.5 billionrecorded in 2003-04 and $3.0 billion in 2004-05 by setting steadily declining deficit targets of$2.8 billion in 2005-06, $2.4 billion in 2006-07, $1.5 billion in 2007-08, and achieving a balancedbudget no later than 2008-09. A balanced budget will be achieved one year earlier, if the reserve is notrequired in 2007-08.


This paper provides an overview of the following:

Ë Section I: Strengthening Ontario by Investing in People: Early Learning, Education,Postsecondary Education, Health and Infrastructure;

Ë Section II: Ontario’s Fiscal Plan;

Ë Section III: Details of the Fiscal Plan—Ontario’s Medium-Term Fiscal Outlook; and

Ë Section IV: Making Progress: Modernizing Government.

Additional information on Ontario’s finances can be found in Appendix 1, Details on Ontario’sFinances.


Section I: Strengthening Ontario by Investing in People:Early Learning, Education, Postsecondary Education,Health and Infrastructure In the 21st-century global economy, Ontario’s people are its greatest asset. Future prosperity dependson the education, skills and health of the people of Ontario, and the infrastructure that supports them.

This section looks at the plan for early learning, schools, colleges, universities, apprenticeship andtraining programs, health care and infrastructure—the pillars that will support future prosperity.

EARLY LEARNING: BEST STARTChildren need the best start in life to achieve their full potential—and for Ontario to achieve its fullpotential. Research supports the view that the early years have a significant influence on a child, fromthe development of social skills to the ability to learn and succeed.

Despite this knowledge, there has been a lack of investment in high-quality child care and earlylearning programs, especially over the last decade.

For many working families who want access to quality licensed child care, spaces are hard to find andfees are too expensive. They deserve better. They deserve affordable access to child care and earlylearning programs.

The government’s goal is to ensure that children in Ontario will be ready and eager to achieve successin school by the time they start Grade 1.

To date, the government has:

Ë created 4,000 new subsidized child care spaces in 2004-05 across the province;

Ë announced demonstration sites for a comprehensive Best Start plan in Timiskaming, Lambton andKent, and Hamilton;

Ë repaired child care facilities and improved learning resources and equipment at child care centres,through investments of $29 million since 2003-04;

Ë eliminated restrictions on access to child care fee subsidies for parents with RRSPs and RESPs,making more families eligible for subsidies;

Ë strengthened infant hearing and preschool speech and language programs to identify, treat andsupport children with communication disorders by investing $6 million in 2004-05; and

Ë screened all consenting mothers and newborns and provided home visits for mothers of newbornswith developmental or other risk factors through investments of $8 million in 2004-05.


1,106

889874

572533514516522

0

200

400

600

800

1,000

1,200

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

$ Millions

* Expense contingent on funding to Ontario as announced in 2005 federal budget. Excludes Ministry of Children and Youth Services’ child care administration costs.

Source: Ontario Ministry of Finance.

Ontario’sOntario’s Child Care Child Care Planned ExpensePlanned Expense**Operating Operating and and CapitalCapital

Interim OutlookPlanActual

These changes are part of the Province’s longer-term vision—known as Best Start—as announced bythe Minister of Children and Youth Services.

The next phase of the plan is as follows:

To continue to implement Best Start, and increase the number of children arriving at school ready tolearn, the Province will work in partnership with parents, municipalities, schools, communities andearly childhood educators.

The recent federal budget proposed that thefederal government would provide Ontariowith an additional $272 million in 2005-06,rising to $451 million by 2007-08, as part ofa national early learning and child careframework. Over the next three years, theProvince will use all existing Multi-LateralFramework and recently proposed newfederal contributions to expand child careand early learning opportunities, withpriority for children aged four and five. Without these federal transfers, Ontario willnot be able to move aggressively in investingin this important area.

With these federal transfers:

Ë combined Provincial operating and capital spending on child care will more than double comparedto spending levels in 2003-04;

Ë by the end of 2007-08, the Province will significantly increase the number of licensed child carespaces at or near schools so that junior and senior kindergarten students can benefit from aseamless full day of learning and child care;

Ë affordability of child care will be improved through the redesign of child care subsidies, and byincreasing the number of families that can access child care fee subsidies; and

Ë the learning experience of children in child care will be enhanced through the creation of a newCollege of Early Childhood Educators to establish high standards in this profession.

The Province will consult with experts and communities to develop early learning strategies to ensurestrong linkages between the child care and kindergarten learning experience.

When fully implemented over 10 to 15 years, Best Start envisions extending a full day of learningbeginning at age two and a half. Additional and sustained federal contributions are needed if Ontario isto implement the full Best Start vision.


45

50

55

60

65

Reading Writing Math

2001-022002-032003-04

Percentage

Source: Education Quality and Accountability Office.

PercentagePercentage of Grade 3 of Grade 3 Students AchievingStudents AchievingProvincial Standards Provincial Standards ((SchoolSchool--Year BasisYear Basis))

EDUCATION: SUCCESS FOR STUDENTS Schools pass on to children the knowledge that Ontarians all value—and the values they allacknowledge. That is why making publicly funded education the best education is essential to buildinga bright and promising future for all of Ontario. This is how Ontario can build the best workforce andthe strongest society.

Between 1998 and 2003, funding did not keep up with cost pressures facing school boards. Schoolsstruggled to introduce innovations needed to best serve students and their families. The 2004 Budgetlaid out a plan for student success. It provided predictable, multi-year funding to help studentssucceed, while bringing peace and stability to the system. This funding ensures school boards havesufficient resources to lower class sizes, hire more teachers, meet operating costs, maintain schoolfacilities, provide up-to-date textbooks and reach out to more students at risk. It allows the Provinceto cap class sizes at 20 students from junior kindergarten (JK) to Grade 3 by the 2007-08 school year.

The government is focusing on achieving two key results. The first result is high levels of achievement in literacy and math for every student before age 12. Students who do well in the earlygrades are far more likely to complete high school and keep learning beyond high school, in a collegeor university, apprenticeship or training program. The second result is to lower the dropout ratethrough the Learning to 18 strategy. Currently, about 30 per cent of all students entering high schoolleave without graduating.

The government’s goals are to:

Ë increase the percentage of Grade 6 students performing at or above the standard on the Provincialreading and math tests to 75 per cent by 2008;

Ë improve the performance of those schools where two-thirds or more of the students do not meetthe Provincial standard in Grade 3 reading tests; and

Ë reduce the number of students who leave high school without a diploma.


Ë provided support to help Grade 3 andGrade 6 students achieve the first improvements in the Provincial literacyand math tests in three years;

Ë provided support in 2004-05 to anadditional 57 schools that fell below theProvincial average on literacy and mathtests, bringing to 100 the total number ofschools receiving help from turnaroundteams of experts in literacy and math;


18.017.316.916.315.614.813.913.5

0

4

8

12

16

20

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-086,000

7,000

8,000

9,000

10,000GSN ($ Billions)

Source: Ontario Ministry of Education.

GrantsGrants for for Student NeedsStudent Needs((SchoolSchool--Year BasisYear Basis))

Interim Outlook

Funding per Student

Average Per Student $

PlanActual

Ë completed training of 8,000 Lead Teachers in literacy and math for JK to Grade 3, which is theequivalent of two teachers for each elementary school. Training is underway for another 8,000Lead Teachers and for all other elementary classroom teachers in literacy and numeracyinstruction.

Ë hired 1,100 new teachers, resulting in smaller class sizes in about 1,300 schools, as a first step inthe plan to reduce class sizes in JK to Grade 3 to 20 students per class, through an investment of$90 million in the 2004-05 school year;

Ë invested $45 million in 2004-05 in equipment to strengthen technological education programs inhigh schools;

Ë invested $1 million in school-college-work initiatives to promote college education among at-riskhigh school students, increasing to $2 million in 2005-06;

Ë invested $18 million in more than 100 programs to increase high school graduation rates;

Ë funded designated leaders in each school board to develop and co-ordinate programs for at-riskyouth in order to increase graduation rates; and

Ë extended the Ontario Scholar Program to include workplace- and college-bound students.

These improvements were achieved by providing school boards with more than $650 million inadditional Grants for Student Needs (GSN) funding in the 2004-05 school year, compared to 2003-04.


Ë Over the next three years, the Provincewill continue to implement its plan,announced in the 2004 Ontario Budget,to make substantial investments ineducation. By 2007-08, the Provincewill provide $2.4 billion in new GSNfunding to school boards compared to2003-04 levels, an increase of more than15 per cent on a school-year basis. Average per-student funding willincrease by more than $1,250 or 16 percent to almost $9,200.

Ë In 2005-06, funding will increase byalmost $650 million, to $16.9 billion, or8.4 per cent higher than the 2003-04school year.

Ë In addition to Grants for Student Needs, the Province will also provide $250 million in 2005-06for specific programs to increase literacy and numeracy levels and high school graduation rates.

Ë Four-year collective agreements are being negotiated across the province between teachers andschool boards, within an agreed-upon Provincial framework, bringing peace and stability toOntario schools.


Ë Annual Good Places to Learn funding, announced in February 2005, will allow school boards toundertake $4 billion in projects over the next three years, including school construction, facilityrepairs and renewal.

Ë The Province will implement the next steps in achieving a cap of 20 students per class for JK toGrade 3.

Ë The Province will also provide funding to hire specialist teachers in support of higher literacy andmath achievement and to increase programming in physical education, music and the arts.

Ë The Province is implementing a Learning to 18 strategy in 2005-06 that will include funding toschool boards for additional teachers to assist struggling students. It will also include an improvedGrade 9 math curriculum that will maintain high standards and be more suitable for appliedprograms, and new Grade 9 and 10 courses will provide students with more opportunities toacquire credits.

Ë The Province will work closely with school boards to review board business practices and toimplement strategies to ensure the effective use of education funding. For example, the Provincewill assist school boards to work collaboratively to reduce costs in purchasing, transportation andcapital planning.

Overall, the Province’s education plan will provide $2.9 billion in additional GSN funding to supportschool boards and to provide targeted literacy and numeracy programs, compared to the funding levelsin September 2003.

REACHING HIGHER: THE MCGUINTY GOVERNMENT PLAN FOR POSTSECONDARYEDUCATION Ensuring the best start for the children of Ontario, and ensuring that public education is the besteducation, is essential to people’s success and the future of Ontario. But it must not stop there. IfOntario is to achieve its full potential, it is critical to reach higher when it comes to postsecondaryeducation. Ontario’s colleges, universities and training programs must equip people for success bypreparing them to generate the ideas, products and jobs that will ensure future prosperity—theprosperity that funds the social programs that keep society strong. A strong postsecondary educationalso provides each individual with the opportunity to achieve his or her full potential. Unfortunately,Ontario’s colleges and universities are under-resourced—revenues have not kept up with enrolmentand the costs associated with a 21st-century postsecondary education system. This has a number ofimplications, including the fact that Ontario has fewer students who earn postgraduate degreescompared to many U.S. jurisdictions.

In the 2004 Budget, the government asked former Premier Bob Rae to undertake a review ofpostsecondary education in Ontario. His recommendations, delivered in February 2005, are consistentwith the government’s strategic direction of strengthening the province by investing in its people.

This Budget announces the McGuinty government’s action plan for colleges, universities and training,highlighted by a new $6.2 billion cumulative investment, including an additional $683 million in2005-06, rising to $1.6 billion by 2009-10. That will represent a 39 per cent increase compared to the


2004-05 funding base.

This is a historic, multi-year investment in postsecondary education—the largest in 40 years. TheProvince expects that this investment will yield the largest improvements in 40 years.

It is an essential investment—one that will translate into a competitive advantage, economic growth,and a higher standard of living for Ontario. The brains and know-how of a skilled workforce are thecompetitive edge of the 21st century. Ontario requires a postsecondary education and training systemthat is among the best in the world.

With the Reaching Higher investments, the people of Ontario will see improved access and quality inpostsecondary education, better facilities, and postsecondary institutions will be held accountable foraccomplishing these objectives.

The Reaching Higher plan will deliver:AccessË More student financial assistance.Ë Increased enrolment in colleges and undergraduate university programs.Ë Increased graduate student enrolment.Ë Increased enrolment in medical schools.Ë Increased apprenticeship positions.Ë More new Canadians who are better able to contribute their skills to Ontario's economy.QualityË More faculty.Ë More time for faculty to spend with their students.Ë More innovative research.Ë Better resources and improved pathways for students.AccountabilityË A proposed new Higher Education Quality Council of Ontario charged with identifying performance targets for the

postsecondary education system.Ë Agreements between the government and postsecondary institutions that ensure that these results are achieved.

Funding will be contingent upon these results.

The government’s goals are:

Ë Access—enhanced student financial assistance, increased enrolments, and expanded opportunitiesfor aboriginals, francophones, new Canadians, persons with disabilities and “first generation”students whose parents did not attend postsecondary institutions.

Ë Quality—the postsecondary education and training system will be one that achieves the higheststandards in teaching, research and student learning experience, resulting in the skills andinnovation that will support economic growth.


Ë Accountability—targets and measures will be set to monitor the quality and performance of thepostsecondary education sector.


Ë frozen tuition fees for 2004-05 and compensated colleges and universities for the revenue loss;

Ë expanded access to student financial assistance, benefiting over 50,000 students;

Ë increased funding for nursing education by $15 million in 2004-05, including funding to enhancethe qualifications of nursing faculty;

Ë introduced a new Apprenticeship Training Tax Credit of up to $5,000 for each of the first threeyears of an eligible apprenticeship; and

Ë provided additional support for apprenticeships, at-risk youth and bridge training for newCanadians.

The next phase of the plan for Access is as follows:

Ë Improve student financial assistance so that 135,000 low- and middle-income students benefitfrom enhancements in 2005-06. This includes 32,000 students who will benefit from a new low-income tuition grant. The grant will provide up to the lesser of $6,000 or 100 per cent of theirtuition for 16,000 first-year dependent students in co-operation with the federal government andthe Canada Millennium Scholarship Foundation. To further enhance student support, Ontario willfund a grant of up to the lesser of $3,000 or 50 per cent of their tuition for 16,000 second-yeardependent students.

Ë Continue tuition freeze for 2005-06 and begin work immediately with students, colleges anduniversities on a new tuition framework to be in place by September 2006.

Ë Significantly increase enrolments at colleges and universities.

Ë Improve access and success of under-represented groups including francophones, aboriginals,persons with disabilities and students whose parents did not attend postsecondary institutions.

Ë Substantially expand graduate education by 12,000 full-time students by 2007-08 and 14,000students by 2009-10.

Ë Expand new first-year medical education spaces by 15 per cent.

Ë Increase the number of new annual entrants into apprenticeship by 7,000, reaching 26,000 newentrants in total by 2007-08.

Ë Increase the number of internationally trained people qualified to work in Ontario.


The next phase of the plan for Quality is as follows:

Ë Increase faculty at colleges and universities to accommodate higher enrolment and improvestudent success.

Ë Improve student experience through better student/faculty interaction and learning supportsystems.

Ë Achieve higher student retention and completion rates.

Ë Improve pathways for students and increase collaboration between Ontario colleges anduniversities.

The next phase of the plan for Accountability is as follows:

Ë Improve system performance and result measures, including quality and access, through aproposed new Higher Education Quality Council of Ontario and new bilateral performanceagreements with postsecondary institutions.

Ë Improve public reporting of system-wide performance and results.

Reaching Higher InvestmentsBy 2009-10, Ontario will provide $6.2 billion in new cumulative investments for postsecondaryeducation and training through the Reaching Higher plan. By 2009-10, new investments will rise to$1.6 billion, a 39 per cent increase compared to the 2004-05 funding base.

As the new plan is implemented, Ontario needs a strong commitment from all partners: the federalgovernment, parents and students, colleges and universities, employers and workers, and alumni.Strong partnerships will mean that results will be achieved faster.

Reaching Higher: New Ongoing Operating Investments*($ Millions)

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10Cumulative

TotalStudent Financial Assistance 150 192 241 282 314 358 1,537Operating Grants to Colleges

and Universities50 447 732 932 958 1,156 4,275

Training and Apprenticeshipand Other Initiatives

- 44 62 86 87 87 366

Total New Investment 200 683 1,035 1,300 1,359 1,601 6,178* Increase over 2004-05 base funding, which is the 2004-05 Interim excluding $200 million in expenditures provided for the Ontario

Student Opportunities Trust Fund, endowments for graduate fellowships and faculty research chairs, and college stabilization.Source: Ontario Ministry of Finance.


To initiate the plan in 2004-05, the Province provided $200 million in operating funding:

Ë $100 million to create endowments at universities that will provide fellowships for outstandinggraduate students;

Ë $50 million for the Ontario Student Opportunities Trust Fund (OSOTF) to match private-sectordonations for student financial assistance;

Ë $25 million to help stabilize colleges experiencing financial difficulties; and

Ë $25 million to endow new faculty chairs for research and improve graduate education.

In addition, the Province provided $250 million in one-time capital funding in 2004-05:

Ë $200 million to begin needed repairs to college and university buildings; and

Ë $50 million to improve college equipment.

Student Financial AssistanceOntario is taking immediate steps to ensure that all eligible students can afford postsecondaryeducation.

The government will:

Ë provide $192 million in new investments in 2005-06 to enhance student financial assistance. By2009-10, new investments for financial assistance will reach $358 million, more than double thebase funding provided in 2004-05. Student loan programs will be enhanced and new grants willbe made available;

Ë as a first step, join with the federal government to expand eligibility for student loans and increaseOntario weekly loan amounts from $110 to $140 for single students. Ontario will also reduce howmuch money middle-income parents are expected to contribute to their children’s education,expand interest relief and recognize computer costs in student loan needs assessments;

Ë establish a new Millennium-Ontario Access Grant through an agreement with the CanadaMillennium Scholarship Foundation to enhance access for low-income students. In co-operationwith the Foundation, 16,000 eligible first-year students will receive grants of up to $3,000. Whencombined with the new low-income grant being provided by the federal government, eligible first-year students could receive a total grant of up to the lesser of $6,000 or 100 per cent of theirtuition. Ontario will further enhance student financial assistance by funding a low-income tuitiongrant of up to the lesser of $3,000 or 50 per cent of their tuition for 16,000 eligible second-yearstudents;

Ë implement these various student assistance program changes in the fall of 2005, benefitingapproximately 135,000 low- and middle-income students this year;

Ë provide $50 million annually to match funds raised by colleges and universities to establishendowments for student financial assistance. A new Ontario Trust for Student Support will bebased on an allocation method that takes into consideration the limited fundraising capacity ofsmaller institutions; and


3.13.33.53.73.94.14.34.54.7

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

New Cumulative $4.3 Billion Operating Grant Investments2004-05 Funding Base*

$ Billions

* Excludes $50 million in one-time expenditures for college stabilization and faculty research chairs.Source: Ontario Ministry of Finance.

Operating Operating Grants Grants to to Colleges Colleges and Universitiesand Universities

Interim

1.2

0.05

0.9

4.5

OutlookPlan

4.3

3.7

4.04.2

0.4

0.7

1.0

3.3

Ë continue to work with the federal government to broaden and expand student assistance in2006-07 and beyond.

Enhanced OpportunityThe government will support new strategies to provide greater opportunity for those who have nottraditionally benefited from postsecondary education.

Ë $10 million in 2005-06, rising to $55 million by 2009-10, will be provided to institutions toundertake new programs and outreach in order to improve participation in postsecondaryeducation by all under-represented groups including francophones, aboriginals, persons withdisabilities and those who would be the first in their families to attend college or university. Partof this funding will be used to help French-language colleges and bilingual universities foster amore vibrant francophone postsecondary education community in Ontario.

Ë Northern and rural colleges will be provided with $20 million in new funding by 2007-08 toincrease access to high-quality programs in their communities.

Ë A new community-based nursing education program in northern Ontario will be piloted.

Ë A new strategy to attract more international students and to encourage study abroad for Ontariostudents will be implemented.

New Funding for Postsecondary InstitutionsIn this Budget, the government is providing significant multi-year increases to operating grants tocolleges and universities. By 2009-10, the Province will make new cumulative investments of$4.3 billion to improve postsecondary education. To ensure that these investments achieve measurableresults, the Province will work with colleges and universities to establish performance measures,including targets for hiring new faculty, accommodating higher enrolments and improving studentsuccess.

College and university operating grants in2005-06 will be $447 million or 14 per centhigher than 2004-05 base funding. In2009-10, new ongoing investments willreach $1.2 billion, or 35 per cent higher thanbase funding in 2004-05.

These new operating investments in collegesand universities will fund enrolment growth,expand graduate education and create newfaculty positions. The investments will resultin improvements to the student learningexperience by increasing contact betweenfaculty and students, and by providing betterstudent services, and will result in higher quality research. Overall, quality will improve. The


government’s expectation is that this historic investment will not simply be used to enrichcompensation packages within the system.

Key initiatives include:

Ë expanding graduate education to help make a place for double-cohort students and address facultyshortages through new investments of $220 million annually by 2009-10;

Ë increasing the number of new first-year spaces at medical schools by 15 per cent and improvingthe quality of medical education by providing $95 million in new funding;

Ë providing capital support to ensure that medical schools and graduate departments canaccommodate the increased number of students;

Ë proposing to establish a Research Council of Ontario to advise on and co-ordinate researchpriorities and allocate funding based on these priorities; and

Ë working with postsecondary institutions to ensure that the student experience is enhanced.

Universities will also be able to apply for Ontario Strategic Infrastructure Financing Authority loansfor investments that support their work as world-class educators and innovators.

Greater AccountabilityThe government’s new investments will be tied to performance and results targets.

Ë Multi-year agreements between the government and institutions will set out, among otherexpectations, enrolment and quality improvement targets.

Ë The government proposes to establish a new arm’s-length Higher Education Quality Council ofOntario that would take a lead role in supporting quality improvement in postsecondary education.The Council would undertake research on indicators and outcomes, advise on system-wide results,and report on system performance.

Ë The government proposes to make Ontario’s universities subject to the provisions of the Freedomof Information and Protection of Privacy Act and to ensure that Ontario publicly fundedpostsecondary institutions are transparent and accountable to the people of Ontario while, at thesame time, respecting academic freedom and competitiveness.

An Effective Partnership with the Federal Government Will Accelerate the PlanThe government is committed to its new plan for postsecondary education and training. A full andeffective partnership with the federal government would allow the Province to move more quickly toimplement the Reaching Higher plan. Ontario is the economic engine of Canada. Investments inpostsecondary education are a vital part of Ontario’s future economic growth, which will benefit all ofCanada.

Ë Ontario could make faster progress in improving postsecondary education if the federalgovernment responds positively to Ontario’s call for a restoration of funding for postsecondaryeducation. In addition, Ontario is asking the federal government to join with Ontario to enhance


student financial assistance and funding for research and graduate studies.

Ë Ontario also needs to establish immigration and labour-market agreements with the federalgovernment. Through these agreements, new funding and transfers will support labour-markettraining and other services for new Canadians.

Creating a Responsive Training and Apprenticeship SystemOntario recognizes that a responsive training and apprenticeship system, including effective programsfor new Canadians and at-risk youth, is another key element for success in today’s global economy.

This Budget builds on current programs with new training investments that reinforce the government’spriorities.

Ë An additional $17.5 million annually by 2007-08 to create more systematic and supported accessto labour-market services for two priority client groups: new Canadians and prospectiveapprentices. New services will be part of the new One-Stop Training and Employment System, amore seamless and co-ordinated service delivery network currently being implemented, asannounced in the 2004 Budget.

Ë $2.5 million per year to expand Ontario’s current Bridge Training programs, supporting additionalprojects to assess competencies, and to provide training and work experience for skilled newCanadians.

Ë $4 million over the next two years for colleges to pilot improved processes and programs that willhelp new Canadian students better access college training.

Ë $1 million over two years to pilot programs with employers to help them better recognize and usethe skills of new Canadians. The first pilot will support the Toronto Region ImmigrantEmployment Council (TRIEC) for outreach with employers in the Greater Toronto Area.

In order to protect the interests of students and set standards for quality, the government intends tointroduce legislation that would, if enacted, enhance the regulation of the operations of private careercolleges that offer vocational training to more than 35,000 students.

Reaching Higher Will Mean Tangible BenefitsThe government is committed to achieving the goals of access, quality and accountability. ThisBudget provides new multi-year investments to achieve these goals. Working with all its partners,Ontario will offer higher education that will be among the best in the world. A skilled workforce willsupport continued economic strength in Ontario.

In conclusion, the Reaching Higher plan will result in tangible benefits:

Ë Doubling the funding available for student assistance by 2009-10, with 135,000 low- and middle-income students immediately benefiting this year from the new tuition grant, higher weekly loansand reduced parental contributions to student assistance, allowing students to reach higher.


2.73.0 3.5 3.7 3.9

05

10152025303540

2003-04* 2004-05 2005-06 2006-07 2007-08

Institutions Other Community

$ Billions

* 2003-04 excludes SARS-related health costs and major one-time costs of $824 million.Note: Numbers may not add due to rounding.Source: Ontario Ministry of Finance.

Ministry of Ministry of Health andHealth and LongLong--TermTerm Care Care Operating Operating SpendingSpending

Actual Interim

13.9

12.714.8

11.413.6 14.2

35.9

OutlookPlan

34.6

28.031.1 32.9

15.4 15.9 16.7 17.2

Ë Significantly more college and university students enrolled and preparing for the jobs oftomorrow, creating the economic growth of tomorrow.

Ë Assured quality teaching and an improved student learning experience, which will be competitivewith the best in the world.

Ë 14,000 more graduate students by 2009-10, creating knowledge and ideas for economic growthand ensuring Ontario’s role as a North American leader in research and innovation.

Ë More doctors through a 15 per cent expansion of first-year medical education spaces.

Ë Thousands more new Canadians able to contribute their skills to Ontario’s economy.

HEALTH: BETTER ACCESS TO BETTER CARE Ontario’s greatest asset is its people. And Ontarians’ greatest asset is their health. The government’splan is to do more to help people stay healthy, to better care for them if they do become sick, and to dowhat is necessary to ensure medicare is sustained for generations to come.

A publicly funded health care system defines what it is to be Canadian. It is one of the ways Canadianscare for one another. But it is even more than that. It is a competitive advantage for Ontario—one thathelps attract investment and jobs, especially in light of the soaring cost of private medical insurancethat is often cited when job creation lags in the United States.

The 2004 Ontario Budget recognized the importance of health to Ontarians. It laid out a plan to:

Ë promote better health and prevent illness;

Ë improve access to doctors, nurses and other health professionals;

Ë shorten wait times for key services;

Ë modernize health infrastructure; and

Ë increase efficiency and accountability in the health care sector.

Progress is being made in all of these areas,and the 2005 Budget builds on this plan. By2007-08, an additional $4.8 billion will beinvested in health care programs and servicesthan in 2004-05. But this Budget, like itspredecessor, recognizes that money alone isnot the answer. Fundamental change isneeded to ensure that Ontarians’ health needscan be met and the “medicare advantage”preserved.


Change is needed because health care costs continue to grow at unsustainable rates. In fact, asOntario’s population grows and ages, and new medical advances are discovered and put into practice,health care costs continue to grow faster than the economy. That is why the government continues tobalance the need to slow the rapid rate of growth in health care spending with the need for targetedinvestments in key service areas. It is critical to sustain medicare for future generations while, at thesame time, ensuring its responsiveness to the needs of Ontarians today.

What follows is a step-by-step look at the progress made—and the next phase of the plan—for each ofthe goals first identified in the 2004 Budget.

Keeping Ontarians HealthyThe government’s goal is to promote better health and prevent illness.


Ë added three new vaccines free of charge (for chicken pox, meningococcal meningitis andpneumococcal disease) to the recommended schedule of routine childhood immunizations.Last year, over 800,000 vaccinations were administered, saving families up to $600 per child;

Ë introduced legislation that, if passed, will prohibit smoking in all enclosed workplaces and publicplaces in the province as of May 31, 2006;

Ë funded an ad campaign to motivate smokers to quit. Provided additional funding to the Smokers’Help line, run by the Ontario Division of the Canadian Cancer Society, to expand their hours ofservice. Also created stupid.ca, an anti-smoking campaign created by youth, for youth;

Ë directed school boards to remove all junk food from vending machines in elementary schools toencourage young people to make healthy food choices;

Ë established ACTIVE2010, a program to help local and not-for-profit organizations provide andenhance opportunities for physical activity and community sport and recreation. As well, in thefall of 2004, Pause to Play was launched to encourage children and youth to make physicalactivity a regular part of their daily lives;

Ë supporting healthy, active lifestyles by reconnecting school gyms and fields to neighbourhoodnon-profit groups through an annual investment of $20 million to cover the incremental costs ofcommunity use of school facilities;

Ë increased the Provincial share of public health unit costs from 50 per cent in 2004 to 55 per centin January 2005, rising to 65 per cent by January 2006 and to 75 per cent by January 2007,supporting the importance of these units in the Provincial health system and improving themanagement of infectious disease outbreaks; and

Ë launched Operation Health Protection, a three-year action plan that contains the mostcomprehensive changes to the public health system since the 1980s. This action plan will reviewthe governance and accountability structure of public health units; increase the number of medicaland scientific personnel; establish a committee of experts to provide advice to the Chief MedicalOfficer of Health on prevention, surveillance and control of infectious diseases in Ontario; and hasestablished new communications and information technology (IT) capabilities within public healthunits.



Ë Improving access to community support services for seniors, frail elderly people and people withphysical disabilities. By 2007-08, over 232,000 Ontarians will receive support in theircommunity. A co-ordinated and integrated support system will allow people to continue to live intheir communities rather than having to be admitted to institutions.

Ë Expanding the capacity of the mental health system to provide counselling, crisis response andearly intervention for almost 79,000 more individuals in need of mental health services in thecommunity by 2007-08.

Ë Enabling health care providers in hospital emergency departments to electronically access the drughistory records of Ontario’s drug program recipients by 2007-08. This electronic access will helpto speed up the process of diagnosis and treatments, as well as reduce the incidence of drug-relatedadverse medical reactions and unnecessary hospital admissions.

Ë Initiating a new patient drug information program among pharmacists, doctors and patients toimprove management of patients’ medications.

Improving AccessThe government’s goal is to improve access to doctors, nurses and other health professionals.


Ë approved 52 Family Health Teams (FHTs) and three networks of FHTs to improve access toprimary care for over one million Ontarians in 47 communities. This exceeds the original targetfor this spring, which had been 45 FHTs. Family Health Teams include doctors, nurses and otherhealth professionals working together to keep patients healthy and provide comprehensive carewhen they need it;

Ë begun expansion of primary care services to 350,000 Ontarians through Ontario’s 54 CommunityHealth Centres by investing an additional $30 million over two years from 2003-04 to 2005-06;

Ë provided $12 million in 2004-05, growing to $26 million in 2005-06, to train up to 200International Medical Graduates (IMG) to increase the number of doctors in Ontario andconducted the largest clinical assessment of foreign-trained physicians ever held in Canada. Through IMG-Ontario, an assessment, training and placement centre, internationally traineddoctors can become qualified to practise medicine in Ontario;

Ë signed a new four-year agreement with the Ontario Medical Association that will help bring moredoctors to underserviced communities; encourage physicians to care for additional patients;provide more preventive care such as helping Ontarians quit smoking, screening for cancer, andmanaging chronic diseases, including diabetes; support physician services to reduce wait times forcancer care, cardiac care, hip and knee replacements and cataract surgeries; and promote moreefficient use of hospital resources;

Ë funded more than 3,000 new nursing positions in hospitals, long-term care homes, home care andcommunity care agencies in 2004-05;

Ë funded initiatives to improve working conditions and educational and professional opportunitiesfor nurses including $60 million to purchase 11,000 bed lifts to help reduce on-the-job injuries;


$10 million for continuing education programs delivered by nursing associations; and $10 millionover four years to increase the number of fully qualified faculty available in postsecondaryinstitutions to educate tomorrow’s nurses;

Ë improved health care in northern and remote communities by investing $14 million in 2004-05 intelemedicine technology. With this funding, 28 new sites were opened, bringing the total numberof hospital sites equipped with telemedicine technology to 168 sites across Ontario; and

Ë invested a record $1.3 billion in home care last year to provide services to almost 454,000Ontarians, including services for an additional 21,400 acute care patients.


Ë Increase the number of Family Health Teams (FHTs) to 150 by 2007-08 to provide access toprimary health care services for approximately 2.5 million Ontarians.

Ë Expand the number of first-year spaces at medical schools by 15 per cent and improve the qualityof medical education through $95 million in funding through the Ministry of Training, Collegesand Universities. This is in addition to the 56 new medical students who will begin their trainingwhen the Northern Ontario School of Medicine opens in September 2005. At full capacity, theschool will have 224 undergraduate and over 200 residency positions to accommodate graduatestudents each year.

Ë Create 14 Local Health Integration Networks (LHINs) to facilitate the delivery of health careservices in Ontario. When fully implemented, it is proposed that the LHINs would plan,co-ordinate and fund local health care services in their areas, putting their patients’ needs at thecentre of their plans and aligning the resources of the network to support local health carepriorities.

Ë Support end-of-life care services, including those in residential hospices, for 4,300 adults andchildren in their communities by investing an additional $39 million this year.

Shorter Wait TimesThe government’s goal is shorter wait times for key services.


Ë increased funded hours of operation on existing MRI machines and upgraded seven MRI machinesand 27 CT scanners to yield an additional 33,000 or 14 per cent more MRI exams and capacity fora further 81,300 or eight per cent increase in CT scans in 2004-05;

Ë carried out an additional 5,380 surgical procedures in 2004-05, including 1,700 cancer surgeries,1,680 or seven per cent more hip and knee joint replacement surgeries, and 2,000 or two per centmore cataract surgeries; and

Ë gathered wait-time and volume information last year pertaining to cataract surgery, hip and kneereplacements, MRI/CT scans and selected cancer surgeries and cardiac procedures to establish abaseline against which progress will be measured.



Ë As Ontario’s hospitals continue to play a key role in the health care system, funding will increasefrom $11.4 billion last year to $12.0 billion in 2005-06 and to $13.0 billion by 2007-08. Thegovernment is moving forward to further modernize the way hospitals are funded. For the firsttime, individual hospitals will receive service-based funding allocations for more than one year.

Ë Nine new or upgraded MRI machines will be operating by the end of 2005-06. When combinedwith funding for additional hours on existing machines, this will result in 53,200 or 19 per centmore MRI exams being performed this year.

Ë In 2005-06, hospitals will provide almost 2,900 more cancer surgeries, 14,000 or 13 per cent morecataract surgeries, almost 7,000 or eight per cent more cardiac procedures and over 4,300 or 16 percent more hip and knee joint replacements than in 2004-05.

Ë A new Web site will provide Ontarians with information on key health care services. By the endof 2006, the Web site will have complete and regularly updated information on wait times for fivekey health service areas: hip and knee replacements, cataract surgery, cancer surgery, MRI/CTexams and selected cardiac procedures.

Ë With the help of experts in each of the key fields, targets will be established for acceptable waittimes to ensure timely access to the five key services. As well, based on recommendations fromexpert panels, process standards and improvements to make hospitals more efficient in theirdelivery of key health services will be implemented.

Modernizing Health InfrastructureThe government’s goal is to modernize Ontario’s health infrastructure by updating equipment andexpanding the capacity to cope with a growing and aging population.


Ë provided $61 million to hospitals in 2004-05 to help address infrastructure deficiencies and tomaintain the current buildings in good condition; and

Ë accelerated 19 projects to expand and renew facilities and to carry out the planning and designwork for regional cancer centres in Kingston and Ottawa through an investment of $184 million in2004-05.


Ë Providing funding for new hospital projects over five years that will reduce wait times, providebetter services in high growth areas, and modernize older hospitals.


Efficiency and AccountabilityThe government’s goal is to increase efficiency and accountability, as the Province moves towards ahealth care system that is locally managed, streamlined, cost-effective and focused on results forpatients.


Ë reached service-based performance management agreements with hospitals to help ensure that allhospitals achieve agreed-upon outcomes within allocated resources; and

Ë passed legislation to establish the new Ontario Health Quality Council to report annually to thepublic on results being achieved in the health care sector.


Ë Work with health care providers and the public to continue to find the best ways to allocateresources, and ensure that spending growth in the health care sector is affordable and delivers theoutcomes patients deserve.

Ë Continue to press the federal government to provide a fair share of Canada Health Transfer cashfunding to meet Ontario’s needs.

INFRASTRUCTURE: BUILDING A BETTER TOMORROWOntario’s economy depends on the strength of its people, and the people of Ontario depend oninfrastructure that is modern, reliable, efficient and affordable. Children learn better in schools that arein good repair, and patients cope better in comfortable, up-to-date hospitals. Ontarians’ health dependson water and sewer systems that keep them safe from illness. Commuters need reliable public transitand highway systems to travel from home to work. Businesses need transportation networks to get theresources required to produce goods and services, and to get goods and services to market, especiallyin an export-based economy.

Ontario’s auto sector, for instance, works on a system of “just-in-time” deliveries of inventories.Instead of expensive warehousing, assembly plants depend on last-minute parts deliveries. For everyminute of delay caused by gridlock on overused highways, productivity is threatened, and so are thejobs and prosperity that Ontarians and the Province depend upon.

Investments in infrastructure have been made over the past 10 years, but, too often, some of thebiggest infrastructure needs have been put on hold. That must change. To ensure Ontarians can meetthe demands of the 21st century, Ontario’s infrastructure must be strengthened before too much of it isbeyond repair.

The government is committed to a five-year, $30 billion infrastructure investment plan. This plan includes the Province’s own gross capital investment over the next five years, capital funding providedto school boards through operating grants, funding provided through per-diem payments for long-term


care homes, funding provided to municipalities through the gas tax for public transit, cost-sharing bypartners, and the value of projects that will be paid for over their useful lives.

In July 2004, the government released Building a Better Tomorrow: An Infrastructure Planning,Financing and Procurement Framework for Ontario's Public Sector, to support the development andimplementation of the government’s infrastructure investment strategy. The Framework sets out coreprinciples that will be followed whenever the government is procuring any major capital project,including: the public interest must be paramount; value for money must be demonstrable; andprocesses must be fair, open and transparent.

Key ObjectivesINFRASTRUCTURE PLAN:Renewing InfrastructureË Increasing investment to keep the highway system in a state of good repair in both southern and northern Ontario.Ë Investment to begin to address the infrastructure deficit in schools and postsecondary institutions.Ë New program introduced last year to provide regular funding to hospitals for upgrades and renewal.Ë Upgrading municipal water and wastewater systems and developing a strategy to meet future investment needs.Building New InfrastructureË Funding new, expanded and upgraded hospitals, including many in rapidly growing areas of the province.Ë New spaces in graduate schools and medical schools to accommodate the double cohort and expand the supply of

doctors.Ë Major, sustained investment in key transit services, including a 10-year plan to expand and renew GO Transit, five-

year funding for the Toronto Transit Commission (TTC), and future funding for the Ottawa O-Train.Ë New highway projects to improve access to border crossings and address highway congestion and safety concerns.Ë Investing in the creation of 15,000 new affordable housing units; $300 million over four years for research

infrastructure; and numerous new electricity projects.Managing BetterË More emphasis on planning and design to ensure that infrastructure projects are well planned and meet future

needs, including funding for planning work for transportation, hospital and justice projects.Ë Examine ways to reduce the time required for the planning, design and approval of major transit expansion projects.

Furthermore, the government will look to fund capital assets over their service life, rather than fundingthem upfront as the project is built. This funding practice is consistent with how the government fundsits investment in its own assets over each asset’s useful life, and provides a more consistent basis formaking capital decisions across the public sector.

This approach to infrastructure investment will allow the government to expand hospital andpostsecondary infrastructure more quickly than would be possible using traditional funding by:

Ë spreading the costs of projects over the useful life of the asset; and

Ë avoiding cost overruns by shifting risk to the project contractor and establishing clearaccountability.


The government is also investigating ways to encourage Ontario’s pension plans to invest in buildingOntario’s infrastructure rather than investing Ontario’s workers’ money abroad.

The government will also review the existing condition of its infrastructure assets, to identify therepairs necessary to protect the service potential of these assets. The Province has recently announcedgrants to school boards to enable them to finance long-term borrowing for a major investment programto upgrade the condition of Ontario’s schools.

The government has provided new support to municipalities to enable them to invest in their owninfrastructure. This includes gas tax revenue estimated to be approximately $1.4 billion over the nextfive years to support capital investments in public transit. More details on the government’sinfrastructure plan are included in Paper B, Achieving Our Potential: Progress Towards a NewGeneration of Economic Growth.

The Province will continue to urge the federal government to make sustained financial investments inOntario’s infrastructure to support economic growth, key public services and sustainable development.The Province will also seek more flexibility from the federal government on cost sharing, so that thefederal government contributes a larger share of funding for some projects.

Asset Review The Province needs to find new ways of meeting its infrastructure priorities. As part of meeting thischallenge, the Province is reviewing its existing investment in Provincial assets to ensure that theycontinue to serve the needs of the public. Any decisions made by the Province with respect to thestrategic management of its assets will be guided by protecting the public interest, value for moneyand meeting government priorities.

It is never appropriate to sell assets to pay for ongoing operating expenses. Any net proceeds of salesof government assets will, therefore, be invested in priorities that are of lasting value. As a firstpriority, the proceeds of strategic asset management will be used to improve the condition of existinginfrastructure and to provide new infrastructure.

Ontario Strategic Infrastructure Financing Authority (OSIFA)The Ontario Strategic Infrastructure Financing Authority (OSIFA) is an innovative financing vehiclethat provides Ontario’s municipalities and other broader public-sector partners with access to low-costand longer-term loans to renew and build critical public infrastructure. To date, OSIFA has committedto provide 166 municipalities with $2.1 billion in low-cost and longer-term loans for more than 1,000local infrastructure projects such as local roads and bridges, and water and wastewater facilities.Additional details on these projects are provided in Paper B, Achieving Our Potential: ProgressTowards a New Generation of Economic Growth. The municipalities participating in OSIFA’s loanprogram are saving millions of dollars in interest charges and transaction fees over the life of theirloans—savings that benefit local taxpayers. Beginning in 2005-06, the OSIFA loan program is beingbroadened so that loans will also be available to municipalities for investments in local culture,tourism and recreation infrastructure projects. Universities will also be able to apply for OSIFA loans


for investments that support their work as world-class educators and innovators. Energy conservationprojects will be a key OSIFA priority for both the municipal and university sectors.

RESPONSIBLE FISCAL MANAGEMENTWhile the 2005 Budget outlines significant investments in key priority areas, it also provides aresponsible plan to address the financial burden of the structural deficit. The government’s fiscal plantakes important steps to balance the budget. The 2004-05 interim deficit is projected at $3.0 billion,$2.5 billion lower than the previous year and $3.1 billion lower than the 2004-05 projection in the2004 Budget. Further details are included in Appendix 1, Details on Ontario’s Finances. TheProvince’s plan, which includes historic and long-term investments in postsecondary education, is toeliminate the deficit no later than 2008-09. A balanced budget will be achieved one year earlier, if thereserve is not required in 2007-08.

Key objectives:Ë Eliminate the deficit no later than 2008-09. A balanced budget will be achieved one year earlier, if the reserve is not

required in 2007-08.Ë Hold the line on spending in most areas—15 ministries' operating budgets in 2005-06 flatlined, declining or

increasing at a rate less than inflation.Key achievements to date include:Ë 2004-05 interim deficit projected at $3.0 billion—$2.5 billion lower than the previous year and $3.1 billion lower than

the 2004-05 projection in the 2004 Budget.Ë Over half of the $750 million program review savings target set for 2007-08 in the 2004 Budget has been identified.

The 2005 Budget also provides for necessary investments in key areas such as publicly fundededucation, postsecondary education, training, health care and the economy, but in a balanced andresponsible manner. Living within the Province’s means and promoting efficient public services iskey to addressing the structural deficit and ensuring that necessary programs and services areaffordable and available in the long term.


Creation Creation of of thethe Structural Structural DeficitDeficit

(4)

0

4

8

12

16

2000-01 2001-02 2002-03 2003-04

Program Spending

Taxation Revenue

Program Spending growth exceedsTaxation Revenue growth,

creating conditions for structural deficit.

Per cent growth


Section II: Ontario’s Fiscal Plan

ONTARIO’S UNDERLYING STRUCTURAL DEFICITThe creation of Ontario’s structural deficitbegan in 2000-01, when program spendinggrowth began to outpace growth in taxationrevenue. In fact, between 2000-01 and 2003-04, spending on Provincial programs grewby 21 per cent while Provincial taxationrevenue, which provides the bulk and moststable source of Provincial revenue, actuallydeclined by 0.7 per cent. A slowingeconomy during this period, combined withthe impact of tax cuts and a rapid escalationin program spending, culminated in a deficitof $5.5 billion in 2003-04. This was largelya structural deficit, which threatened topersist unless action was taken.

In response to this situation, the 2004 Budget Plan aimed to eliminate the deficit without destabilizinghealth care, education and other key public services by holding average annual growth in totalProvincial program spending to less than the growth in taxation revenue over the medium term.

The 2005 Budget reaffirms the government’s commitment to the fiscal principles originally outlined inthe 2004 Budget. What has become clear over the past year, however, is that Ontario’s social andinfrastructure deficits cannot be eliminated without additional investments over the medium term. Thegovernment believes that years of neglect in these critical sectors must continue to be addressed, but ina fiscally responsible and balanced manner. The government’s medium-term fiscal plan takes intoaccount the additional necessary investments being made to improve Ontario’s health care system,public schools and postsecondary education and training system. Through steadily declining deficittargets and strategic investments in the public infrastructure and services that people value, themedium-term fiscal plan will promote economic prosperity and ensure responsible management of theProvince’s finances, including the elimination of the deficit.


(6)

(4)

(2)

0

2

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09


Ontario’sOntario’s Fiscal PlanFiscal Plan

Fiscal Balance ($ Billions)

(3.0)

1.5

(1.8)

(2.8)(2.4)

(0.9)

(5.5)

(1.5)

0.0

0.0

ReserveSurplus/(Deficit) Before Reserve

Surplus/(Deficit)

Actual Interim OutlookPlan

A RESPONSIBLE AND DISCIPLINED FISCAL PLAN The Province’s plan, which includes historicand long-term investments in postsecondaryeducation, is to eliminate the deficit no laterthan 2008-09. A balanced budget will beachieved one year earlier, if the reserve is notrequired in 2007-08.

Eliminating the structural deficit is a keycomponent to restore responsiblemanagement to Ontario’s finances. However, the government will not force theachievement of a balanced budget at theexpense of all other considerations or ignorethe need to revitalize the Province’s publiclyfunded school, postsecondary education, training and health care systems. Fiscally sustainable socialprograms that people value and that promote economic growth are the hallmarks of good governments.

However, the government cannot ignore the financial burden of the structural deficit either—disciplineis still required. The fiscal plan in this Budget represents a disciplined and balanced approach toinvesting in the long-term viability of public services that people value most while modernizing thedelivery of these services and ultimately returning the Province to fiscal stability.

KEY ELEMENTS OF THE FISCAL PLANThis government introduced the Fiscal Transparency and Accountability Act, 2004, which requiresany government that plans for a deficit to show how and when it will balance the Province’s budget.

The key elements by which the government’s fiscal plan will eliminate the deficit in a responsible wayare as follows:

Ë Achieving a health care system that delivers high-quality, results-focused and patient-centredhealth care within a sustainable funding envelope over the medium term.

Ë Finding the remaining $343 million in program review savings required to meet the $750 milliontarget for 2007-08 as set out in the 2004 Budget.

Ë Ensuring a sustainable revenue base to support the programs and services people value, throughsuch measures as hiring additional service and enforcement staff for tax administration, andimproving the management of the Province’s revenue and accounts receivable.

Ë Maintaining cautious and prudent fiscal planning including an annual reserve.

Ë Making disciplined decisions that hold the line on spending in most areas—15 ministries’operating budgets flatlined, declining or increasing at a rate less than inflation.


The 2004 Ontario Budget indicated that in order to provide funding for priorities while at the sametime balancing the budget, holding the line on spending in most other areas would be required. ThisBudget provides substantial new investments for postsecondary education and health care. At the sametime, many ministries’ operating budgets are either flatlined or declining. There are 15 ministries in2005-06 that are growing at a rate less than inflation, which is expected to be 2.1 per cent in 2005.

Spending Held in Check—15 Ministries’ Operating Budgets Flatlined, Declining or Increasing at a RateLess Than Inflation($ Millions)

Interim2004-05

Plan2005-06

Per CentChange

Agriculture and Food* 733 564 (23.1)Attorney General 1,183 1,199 1.4Community Safety and Correctional Services 1,741 1,753 0.7Consumer and Business Services 201 178 (11.4)Culture 295 275 (6.8)Environment 310 314 1.3Executive Offices 19 19 0.0Finance—Own Account** 1,141 1,126 (1.3)Intergovernmental Affairs 13 8 (38.5)Management Board Secretariat*** 687 469 (31.7)Municipal Affairs and Housing 771 683 (11.4)Native Affairs Secretariat 18 14 (22.2)Natural Resources 485 492 1.4Office of Francophone Affairs 4 4 0.0Tourism and Recreation 184 163 (11.4)* Excludes One-Time and Extraordinary Costs.** Excludes the Community Reinvestment Fund/Ontario Municipal Partnership Fund, Community Reinvestment Fund One-Time

Transition Funding, Interest on Debt and Power Purchases.*** Excludes Retirement Benefits and Contingency Fund.Source: Ontario Ministry of Finance.


KEY RISKS TO THE ECONOMIC AND FISCAL OUTLOOKGiven the multi-year nature of the government’s fiscal plan, there are a number of risks and costdrivers that could affect the way in which the plan is achieved.

The achievement of the government’s fiscal plan is subject to economic risks. Ontario is part of aninterconnected global economy and developments beyond its borders, particularly the strength of theU.S. economy, the Canadian dollar and oil prices, strongly influence the province’s growth. Additional details on Ontario’s economic risks are outlined in the Appendix to Paper B, Ontario’sEconomic Outlook.

A key cost driver within the Province’s deficit outlook is the demand for funding in the health caresector that has been growing each year at unsustainable rates. Over the past five years, from 2000-01to 2004-05, Ontario’s health care operating spending has increased at an average annual rate of 8.2 percent, about twice the rate of Ontario’s nominal GDP growth. By contrast, taxation revenue growth hasaveraged only 2.9 per cent annually during this period. Only 10 years ago, total health care spendingof $17.8 billion accounted for 38 per cent of total Provincial program spending. In 2005-06, thegovernment will invest $32.9 billion in Ontario’s health care system, amounting to 46 per cent of totalprogram spending.

Growth in health care spending that exceeds growth in revenue can only “crowd out” availablefunding for other programs, services and investments, ultimately threatening the long-term economicgrowth potential of the Province. Health care expense must more closely align with the rates ofgrowth in Provincial revenue to address the structural deficit. The government’s medium-term fiscalplan is based on lowering the rate of growth in health care spending to be more in line with economicand revenue growth.

Maintaining fiscal sustainability can also be complicated by the uncertain or transitory nature offederal funding. For example, targeted federal wait-time funding will be reduced by $600 millionnationally in 2008-09, although provinces will be expected to maintain the associated services. Aswell, total transfers to Ontario from the federal government will decline by more than $200 million in2006-07. Similarly, Provincial investments in early learning and child care are contingent on thefederal government providing nationwide funding on an ongoing and sustainable basis.

More details on potential risks, cost drivers and contingent liabilities are contained in Appendix 1,Details on Ontario’s Finances.


(6)

(4)

(2)

0

2

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09


MediumMedium--Term Deficit Reduction Term Deficit Reduction PlanPlan

Fiscal Balance ($ Billions)

(3.0)

1.5

(1.8)

(2.8)(2.4)

(0.9)

(5.5)

(1.5)

0.0

0.0

ReserveSurplus/(Deficit) Before Reserve

Surplus/(Deficit)

Actual Interim OutlookPlan

Section III: Details of the Fiscal Plan—Ontario’s Medium-Term Fiscal Outlook

MEDIUM-TERM FISCAL OUTLOOKThe Fiscal Transparency and AccountabilityAct, 2004 requires the government to providea medium-term fiscal outlook in the budgetthat includes, at a minimum, details on thecurrent fiscal year plus the following twoyears. The 2005 Budget provides details ofplanned revenue and expense from 2005-06through to the 2008-09 fiscal year. Inaddition, this section outlines the majorchanges to the medium-term fiscal outlookfrom the one outlined in the 2004 Budget. Further details are included in Appendix 1,Details on Ontario’s Finances.

The government’s medium-term fiscal plan aims to reduce the Provincial deficit from the $5.5 billionrecorded in 2003-04 and $3.0 billion in 2004-05 by setting steadily declining deficit targets of$2.8 billion in 2005-06, $2.4 billion in 2006-07, $1.5 billion in 2007-08, and achieving a balancedbudget no later than 2008-09. A balanced budget will be achieved one year earlier, if the reserve is notrequired in 2007-08.

Revenue: Details of Medium-Term OutlookTotal revenues are forecast to increase $4.6 billion or 5.9 per cent in 2005-06. Between 2005-06 and2008-09, total revenue is projected to grow at an average annual rate of 4.1 per cent, from$81.7 billion in 2005-06 to $92.2 billion in 2008-09. The revenue outlook in this Budget includes nonew taxes or tax increases.

Ë Taxation Revenue is forecast to increase $2.3 billion or 4.1 per cent in 2005-06 and by$8.9 billion between 2005-06 and 2008-09, with annual growth averaging 4.9 per cent. Overalltaxation revenue growth is consistent with the 4.8 per cent average annual growth of nominalgross domestic product over the 2005 to 2008 period. The taxation revenue forecast is based onthe detailed Ontario economic outlook presented in the Appendix to Paper B, Ontario’s EconomicOutlook, and includes the impact of all revenue measures announced to date, such as the taxadministration effectiveness initiatives announced in last year’s Budget.

– The Personal Income Tax revenue forecast is based on the economic outlook that calls forrising employment, wages and incomes in Ontario.


– Retail Sales Tax revenue growth projections are based on the forecast for increasedhousehold and business spending.

– Corporations Tax is the most volatile of Ontario’s tax revenue sources. These revenues areprojected to decline by 2.8 per cent in 2005-06, and grow modestly afterwards.

– The increase in Ontario Health Premium revenues in 2005-06 is due to the program being inplace for the entire 2005-06 fiscal year, whereas it was only in effect for three-quarters of2004-05. The Ontario Health Premium revenue forecast is largely based on the forecast forpopulation and personal income growth.

– Other Taxation Revenue forecasts are based on their most closely associated economicdrivers. For example, the Employer Health Tax forecast reflects the Ontario wages andsalaries projection and the Land Transfer Tax forecast is consistent with the housing marketoutlook.

Ë Transfers from the Government of Canada are forecast to increase by $1.1 billion or 9.6 percent in 2005-06, and by $0.8 billion between 2005-06 and 2008-09, with annual growth averaging2.0 per cent. This forecast is based on current federal-provincial agreements, fundingcommitments and formulas for major health and social transfers. The outlook includes theincreased health care funding arising from the September 2004 First Ministers’ health agreementof $1.2 billion in 2005-06, $1.3 billion in 2006-07 and 2007-08, and the commitment to increasecertain health transfers by six per cent per year thereafter until 2013-14. Additional EarlyLearning and Child Care funding announced in the 2005 federal budget of $0.3 billion in 2005-06and 2006-07 and $0.5 billion per year thereafter until 2009-10 is included in the forecast. Thedecline in revenues in 2006-07 compared to 2005-06 is primarily due to the final revenue in2005-06 from past federal Canada Health and Social Transfer Supplements and MedicalEquipment Trust Funds.

Ë Income from Government Enterprises is forecast to increase by $0.5 billion or 14.4 per cent in2005-06 and remain fairly flat between 2005-06 and 2008-09, with an average annual growth rateof 0.4 per cent. This forecast is based on information provided by business enterprises. Revenueincreases in 2005-06 and 2006-07 are mainly due to projected increases in Ontario PowerGeneration Inc. (OPG) net income arising from the government’s electricity reforms included inthe Electricity Restructuring Act, 2004, including fair and stable prices for electricity provided byOPG. The decline in revenue in subsequent years is a result of a decline in OPG net income, whichreflects the government’s commitment to close coal-fired generating plants. Liquor Control Boardof Ontario net income is forecast to rise over the forecast period based on increasing sales. Ontario Lottery and Gaming Corporation net income remains fairly flat over the forecast perioddue to continued competitive pressures on border casinos, and the expected continued strength ofthe Canadian dollar against the U.S. dollar.

Ë Other Non-Tax Revenue is forecast to increase $0.6 billion or 10.3 per cent in 2005-06 and by$0.7 billion between 2005-06 and 2008-09, with annual growth averaging 3.5 per cent. OtherNon-Tax Revenue includes a variety of revenue sources, such as reimbursements to the Provincefor services; government licence, permit and other fees; revenue from sales and rentals; and Crownresource royalty payments to the Province. These revenues tend to be primarily influenced bydemographic factors and revenue policies, but some cyclical factors are present such as royaltiesfrom Crown timber. Most of the revenue growth in 2005-06 is due to electricity reforms includedin the Electricity Restructuring Act, 2004, which are expected to increase revenues from the sale


of electricity purchased from non-utility generators. The outlook includes roughly $0.4 billion peryear in revenues arising from amortizing the elimination of the non-utility generator powerpurchase agreement liability over time. Improved management of revenue and accountsreceivable is also expected to boost non-tax revenues over the forecast period.

Expense: Details of Medium-Term OutlookOver the medium term, total expense will rise from $83.5 billion in 2005-06 to $90.7 billion in2008-09, an increase of $7.2 billion. Annual growth in total expense will average 2.8 per cent overthis period, down from the 4.2 per cent growth rate projected for 2005-06.

A key part of the strategy to eliminate the structural deficit will be a disciplined approach tocontaining the growth in program spending to rates below that of taxation revenue. This Budgetprojects that between 2005-06 and 2008-09, program spending will grow by 3.1 per cent on averageeach year, much lower than the 4.9 per cent average annual growth in taxation revenue.

Ë Health care operating spending will grow by 5.9 per cent, or $1.8 billion, in 2005-06. Between2005-06 and 2008-09, health care operating spending will increase by a total of $4.4 billion. Inkeeping with the government’s change strategy, this funding will focus on promoting wellness,providing greater access to primary care, and reducing wait times for MRI/CT scans, cancer care,cataract and cardiac procedures, and hip and knee replacements.

Ë Education spending will grow by $0.7 billion in 2005-06 and by $1.2 billion between 2005-06and 2008-09, reflecting the government’s commitment to stabilize Ontario’s education system,reduce elementary classroom sizes and improve student achievement.

Ë Training, Colleges and Universities will receive $4.8 billion in 2005-06, growing to $5.5 billionby 2008-09 to implement the Reaching Higher plan to increase access to quality postsecondaryeducation and training.

Ë Children’s and Social Services will receive an additional $0.5 billion in 2005-06, with a totaloperating budget growing to $10.3 billion by 2008-09, mainly to implement Best Start, contingenton federal funding for child care, and to renew the emergency energy assistance fund for low-income households. This increase will also allow the government to flow through incrementalincreases to the federal National Child Benefit Supplement to social assistance recipients foranother year, delivering an additional $28 million in benefits in 2005-06.

Ë Justice sector spending will be maintained at approximately the 2004-05 funding level of$2.9 billion over the medium term.

Ë Other Programs will decline by $0.2 billion in 2005-06 and be held to 1.0 per cent averageannual growth over the medium term, with most ministries’ operating budgets flatlined ordeclining.


Medium-Term Fiscal Plan and Outlook($ Billions)

Interim2004-05

Plan2005-06

Outlook2006-07 2007-08 2008-09

RevenueTaxation Revenue

Personal Income Tax 19.1 20.0 21.3 22.7 24.3Retail Sales Tax 14.9 15.5 16.5 17.3 18.2Corporations Tax 9.5 9.2 9.4 9.6 9.8Ontario Health Premium 1.7 2.4 2.5 2.7 2.8All Other Taxes 10.2 10.6 10.9 11.2 11.6

Total Taxation Revenue 55.5 57.7 60.6 63.4 66.7Government of Canada 12.0 13.2 12.9 13.6 14.0Income from Government Enterprises 3.5 4.0 4.2 4.1 4.1Other Non-Tax Revenue 6.1 6.8 7.0 7.3 7.5Total Revenue 77.1 81.7 84.8 88.5 92.2ExpensePrograms

Health Care 31.1 32.9 34.6 35.9 37.4Education (excludes Teachers’ Pension

Plan)10.5 11.3 11.7 12.2 12.4

Training, Colleges and Universities 4.3 4.8 5.1 5.4 5.5Children’s and Social Services 9.2 9.8 10.0 10.2 10.3Justice 2.9 3.0 2.9 2.8 2.8Other Programs 9.5 9.3 9.0 9.5 9.6

Total Programs 67.6 71.0 73.3 75.9 77.9Capital 2.9 2.7 2.5 2.1 2.1Interest on Debt 9.6 9.8 10.0 10.4 10.7Total Expense 80.1 83.5 85.7 88.5 90.7Surplus/(Deficit) Before Reserve (3.0) (1.8) (0.9) 0.0 1.5

Reserve - 1.0 1.5 1.5 1.5Surplus/(Deficit) (3.0) (2.8) (2.4) (1.5) 0.0Note: Numbers may not add due to rounding.Source: Ontario Ministry of Finance.


Capital investment will be $2.7 billion in 2005-06, $2.5 billion in 2006-07, and $2.1 billion in 2007-08and 2008-09. This level of capital investment will support a five-year, $30 billion infrastructure plan. Planned levels of capital investment may be supplemented from the proceeds of strategic assetmanagement initiatives.

Interest on debt costs are forecast to grow by $0.9 billion between 2005-06 and 2008-09, reflecting thegovernment’s deficit targets and professional and cost-effective debt management. In 2005-06, intereston debt costs will amount to roughly 12 per cent of total Provincial revenue and remain there until2008-09.

Fiscal PrudenceIn addition to applying a disciplined approach to balancing strategic investments in key priority areaswith a plan to eliminate the deficit, the government’s medium-term fiscal plan also includes prudencein recognition of the risks inherent in any fiscal and economic forecast. As a result, reserves of$1.5 billion in 2006-07 and beyond have been included to protect against such unforeseen and adversechanges in the economic and fiscal outlook. These reserves are $0.5 billion higher than the$1.0 billion reserve included in 2005-06 to better reflect the risks and uncertain nature of medium-termfiscal projections. These reserves are also over and above the prudence built into the economicoutlook on which the revenue projections for the Province are based.

The deficit will be eliminated no later than 2008-09, and a balanced budget will be achieved one yearearlier, if the reserve is not required in 2007-08.

KEY CHANGES SINCE THE 2004 ONTARIO BUDGETIn the past year, since the release of the 2004 Ontario Budget, a number of key changes have occurredthat have had an impact on the Province’s fiscal outlook. These include changes in the medium-termeconomic outlook, ongoing pressures in health care and the development of a plan to revitalizeOntario’s postsecondary education system as provided for in this Budget.

The following table provides an overview of the key changes to the medium-term fiscal outlook sincethe release of the 2004 Ontario Budget.


Impact of Key Changes to the Medium-Term Deficit Targets($ Billions)

Plan2005-06

Outlook2006-07 2007-08

Surplus/(Deficit) as per 2004 Budget (2.1) (1.5) 0.0Key Revenue Changes Since 2004 Budget:

Taxation Revenue ChangesHigher 2004-05 Taxation Revenue Base 1.1 1.2 1.3Economic Growth Forecast (1.0) (1.1) (1.3)Revenue Initiatives (0.1) (0.1) (0.1)

Net Taxation Revenue Change 0.1 - (0.1)First Ministers’ Health Agreement 1.2 1.3 1.3Additional Federal Early Learning and Child Care

Funding0.3 0.3 0.5

Other Revenue Changes 0.3 0.6 0.8Total Revenue Changes 1.8 2.3 2.4Key Expense Changes Since 2004 Budget:

Postsecondary Education and Training 0.5 0.8 1.0Additional Health Care Investments 2.1 2.7 3.1Additional Education Investments (excludes Teachers'

Pension Plan)- - 0.2

New Investments in Early Learning and Child Care* 0.3 0.3 0.5All Other Expense Changes (Net)* 1.2 0.6 0.3Interest on Debt (1.0) (1.1) (1.0)

Total Expense Changes 3.0 3.2 3.9Change in Reserve (0.5) - -Total Changes Since 2004 Budget (0.7) (0.9) (1.5)2005 Budget Surplus/(Deficit) (2.8) (2.4) (1.5)Reserve 1.0 1.5 1.52005 Budget Surplus/(Deficit) Before Reserve (1.8) (0.9) 0.0* Includes new operating and capital expense.Note: Numbers may not add due to rounding.Source: Ontario Ministry of Finance.

The 2004 Budget projected medium-term deficit targets of $2.1 billion in 2005-06, $1.5 billion in2006-07 and a balanced budget in 2007-08.


Taking into account key revenue and expense changes since the 2004 Budget, including the initiativesannounced as part of this Budget, the Provincial deficit is projected to decline from the $5.5 billionrecorded in 2003-04 and $3.0 billion in 2004-05 to $2.8 billion in 2005-06, $2.4 billion in 2006-07,$1.5 billion in 2007-08, and achieving a balanced budget no later than 2008-09. A balanced budgetwill be achieved one year earlier, if the reserve is not required in 2007-08.

Total revenue is higher throughout the medium term than originally projected in the 2004 Budget,primarily due to higher transfers from the Government of Canada and other non-taxation revenues. Major changes include:

Ë Higher 2004-05 taxation revenues, primarily Corporations Tax revenues, resulting in a higherbase upon which growth is applied, increasing the taxation revenue forecast from 2005-06onwards.

Ë The current economic growth forecast—notably slower Ontario nominal gross domestic product(GDP) growth in 2005 (1.1 percentage points lower) and 2006 (0.6 percentage points lower)—hasreduced the taxation revenue outlook from 2005-06 onwards.

Ë Revenue initiatives taken since the 2004 Budget (see Paper C, Details of Revenue Measures)have reduced the revenue outlook by $0.1 billion per year.

Ë The net change in the taxation revenue outlook, taking into account the higher 2004-05 revenuebase, slower economic growth forecast and revenue initiatives, is a slightly higher level ofrevenues in 2005-06 ($0.1 billion), virtually no change in 2006-07 and a slight decrease in2007-08 ($0.1 billion).

Ë The September 2004 First Ministers’ health agreement increased revenues by $1.2 billion in2005-06 and $1.3 billion in 2006-07 and 2007-08.

Ë Additional early learning and child care funding announced in the 2005 federal budget willincrease revenues by $0.3 billion in 2005-06 and 2006-07, and by $0.5 billion in 2007-08.

Ë Other revenue changes mainly reflect amortizing the elimination of the non-utility generatorpower purchase agreement liability over time and improved management of non-tax revenues.

These increases in total revenue are offset by additional investments made in key Provincial programs,such as publicly funded education, postsecondary education and health care. While the governmentwould have preferred to respond more quickly to the needs of the postsecondary education sector andinfrastructure, the government chose to balance these required investments with disciplined fiscalplanning in order to ensure responsible management of the Province’s finances.

New planned investments since the 2004 Budget include:

Ë Additional funding to implement the Reaching Higher plan to enhance student financialassistance and improve access to quality postsecondary education and training.

Ë Total health care operating spending will be $3.1 billion higher in 2007-08 compared to whatwas projected in the 2004 Budget, largely as a result of the additional federal transfers arisingfrom the September 2004 First Ministers’ health agreement and the incremental funding for health


110

115

120

125

130

135

140

2003-04 2004-05 2005-06 2006-07 2007-08 2008-0921

22

23

24

25

26$ Billions

* Debt is defined as accumulated deficit.Source: Ontario Ministry of Finance.

Ontario’s DebtOntario’s Debt* * and and Projected DebtProjected Debt--toto--GDP RatioGDP Ratio

Actual Interim

124.2

130.0127.2

132.4 133.925.1

Outlook

Projected Debt-to-GDP ratio

Per cent

21.5

133.9

Plan

care announced as part of this Budget—for a total cumulative increase of $7.9 billion over threeyears.

Ë An additional $0.2 billion is being invested in 2007-08, beyond what was outlined in the 2004Budget, to support fully the government’s plan to revitalize Ontario’s publicly funded educationsystem. This investment will ensure the implementation of the government’s goals for studentachievement.

Ë An additional investment of $0.3 billion in 2005-06, growing to $0.5 billion by 2007-08,contingent on federal support, to provide the Province with revenue to implement the Best Startearly learning and child care initiative.

Ë An additional $2.0 billion in spending will be provided to other sectors over the period from2005-06 to 2007-08, including social and other programs that support various economic sectors ofthe province.

As a result of a $3.1 billion improvement in the forecast deficit for 2004-05 from $6.1 billion at thetime of the 2004 Budget to the interim outlook of $3.0 billion in the 2005 Budget, forecast interest ondebt costs are considerably lower over the medium term. These lower interest on debt costs are alsothe result of lower-than-forecast interest rates, and continued professional and cost-effective debtmanagement.

In 2005-06, the reserve was also decreased by $0.5 billion from the $1.5 billion included in the 2004Budget to its current level of $1.0 billion, the typical amount of caution included in the current budgetyear.

PRUDENT DEBT-TO-GDP RATIOSAnother key component of the government’smedium-term fiscal plan to restoreresponsible fiscal management to Ontario isthe commitment to maintain a prudent levelof Provincial debt (defined as accumulateddeficit) relative to the size of Ontario’seconomy as measured by nominal grossdomestic product (GDP). Ongoing debtaccumulation can significantly limit theextent to which vital public services can befunded, as increasing debt charges “crowdout” funds available for spending ongovernment priorities. Responsible fiscalmanagement, therefore, needs to be longterm and intergenerational in focus to ensurethat future generations are not burdened with the cost of current overconsumption or inefficientdelivery of government services.


Consistent with the medium-term fiscal plan contained in this Budget, the Province’s debt-to-GDPratio is projected to decline from 25.1 per cent in 2003-04 to 21.5 per cent by 2008-09.

$23 BILLION GAP The Government of Ontario as well as third parties such as CIBC World Markets have identified a$23 billion gap between the amount Ontarians pay to the federal government in taxes and the amountthey receive in federal programs and services.

The Province’s determination to engage the federal government in addressing this fiscal gap is aboutinvesting in Ontario’s economy. It is about a stronger Ontario for a stronger Canada. It is not aboutbalancing Ontario’s books more quickly than this Budget’s fiscal plan projects.


Section IV: Making Progress: Modernizing GovernmentThe Ontario Government has been recognized as a leading-edge public administration, due to itsability to understand and respond to the needs of the population. Ontarians expect a great deal fromtheir government and the government embraces this challenge. They expect the government to befocused on priorities, achieve the results that matter most to them, and be open, transparent andaccountable in doing so. In addition, they expect programs and services to be well managed so thatthey are receiving excellent value for their tax dollars.

The government is constantly looking at ways to improve programs and services to ensure Ontariansreceive the best return on their investment in public services.

At the same time, the Province needs to live within its means. The 2004 Budget included a plan toundertake a comprehensive review of the programs that the government delivers in order to ensure thelong-term fiscal viability of the programs that matter most to Ontarians. This review process representsa disciplined effort to align medium-term budgeting with priorities and results. The government’sfocus is on modernizing and changing public programs and services to achieve long-term,cost-effective results, and to invest in and protect priority services such as health care and education.

The government’s modernization plan is designed to achieve the following three objectives:

Ë Making progress on program review savings targets—achieve savings of $750 million in2007-08.

Ë Creating more efficient government—provide higher-quality services that are delivered in anefficient and effective manner.

Ë Controlling long-term costs—meet growing public demands for improved health care, educationand other key services at an affordable cost that is fiscally sustainable in the long run.

Making Progress on Program Review Savings TargetIn just one year, the government has implemented plans designed to achieve over half of the$750 million program review savings target for 2007-08, as set out in the 2004 Budget. The majorityof these savings are from administrative and back-office services. Achieving this savings target is animportant component of the government’s plan to ensure long-term responsible management of theProvince’s finances.

Of the $750 million program review savings target for 2007-08, $350 million has been found in directprogram savings and a further $57 million has been found through more efficient management of theProvince’s revenues.


Major areas of program savings by 2007-08 include the following:

Ë Overhauling the government’s internal transactions and business support services, to improveprocesses and streamline purchasing practices, to reduce total procurement costs by 10 per cent by2007-08 and to generate annual savings of $200 million when fully implemented. One example isthe re-tendering of the government’s contract for courier services, which will save approximately$2.5 million on courier charges alone.

Ë Helping government ministries trim their accommodation costs using a strategy that better alignsreal estate needs with government priorities will save $50 million annually by 2007-08. This willbe accomplished, for example, through improved management of realty assets, reduced spacestandards, and the retrofitting of government buildings to reduce energy consumption across theOntario Public Service (OPS).

Ë Reducing information technology spending through better asset management, the consolidation ofinfrastructure and a rationalization of common services and applications across ministries, willsave Ontarians $100 million annually by 2007-08. For example, greater sharing of informationtechnology services and equipment across all ministries will lead to greater reuse of technologyinvestments and a reduction in the overall number of computers required to deliver governmentprograms and services. In addition, the number of computer servers throughout the OPS will bereduced by 20 to 40 per cent.

Other program review measures designed to improve the Province’s business practices will generate afurther $57 million in savings in 2007-08:

Ë These measures include better management of the Province’s revenue and accounts receivable,increased use of electronic funds transfer, early payment discounts from suppliers, reductions insmall value transactions, the use of new technologies and the implementation of new financialmanagement mechanisms such as revolving accounts and special operating agencies.

A next step in modernizing government is the intent to update legislation governing the public serviceto embed the principles of accountability, transparency and delivery of results.

Delivering Efficient GovernmentReviewing government spending on a comprehensive and ongoing basis is what Ontarians shoulddemand and expect. It is through this sort of scrutiny that the government will be able to achieve abalanced budget while ensuring that resources are aligned with priorities and program operations areefficient.

Central to that plan is the reality that the government must focus on what it does best, such asdeveloping policy and legislation, establishing program and service standards, and assuring qualityservice. The Province should only be in the business of direct-service delivery when it can provide aservice more efficiently than anyone else or there is a clear public interest served.


It is within this context that a comprehensive review of Provincial expenses will continue. Thisincludes looking for ways to improve service for Ontarians and ensure efficiency. The review willfocus on large growing programs and identify options to ensure these programs remain affordable, andto continue to look for ways to simplify government by co-ordinating and harmonizing with otherlevels of government.

The government is also reviewing its central operations to ensure that they are refocused to support thegovernment’s modernization plan. This review will mean a smaller, more integrated and strategiccentre of government.

Federal-Provincial PartnershipsThe Province is also seeking to form new strategic partnerships with the federal government in aneffort to reduce overlap and duplication and thereby promote more efficient and cost-effectiveprograms and services. The Province needs the federal government to commit to these strategicpartnerships in order to make progress in closing the federal funding gap and to promote the economicprosperity of Ontario. Key strategies include the following:

Ë Working with the federal government to design a single system for collecting federal and Ontariocorporate taxes that, if implemented, would improve service delivery and provide savings totaxpayers while maintaining Ontario’s fiscal position.

Ë Working with the federal government to develop a co-ordinated labour-market training system toensure that programs meet the evolving needs of Ontarians and working towards a fair share forOntario’s unemployed in Employment Insurance funding. New federal funding to close the gapbetween Ontario and the rest of Canada will expand existing labour-market training services andenable the creation of a seamless, integrated system in Ontario.

Ë Negotiating with the federal government and working towards a fair share in federal funding forsettlement, integration and adult language training services to improve outcomes for Ontario’snew Canadians. A new partnership with the federal government, which improves service deliveryand narrows the funding gap, will help Ontario leverage talented newcomers into jobs andinvestment.

Ë Working with the federal government to strengthen and improve Ontario’s meat inspection systemand move to an integrated and seamless inspection system. Harmonization of meat safetystandards and inspection will create a more efficient and harmonized system across the province.


At present, over 80 per cent of Provincial program spending is in the form of transfer payments toindividuals and organizations. In 2004-05, Provincial program spending amounted to $67.6 billion, ofwhich the seven largest transfer payment programs and three largest ministry-delivered programsaccounted for almost two-thirds of the total.

Major Areas of Provincial Program Spending2004-05 Interim

$ BillionsAs a % of Total

Program SpendingSeven Largest Transfer Payment Programs:

Operation of Hospitals* 11.9 17.5School Board Operating Grants 10.0 14.8OHIP Payments to Physicians and Practitioners 7.4 11.0Social Assistance Benefits 4.0 6.0Drug Programs** 3.3 4.8Colleges and University Operating Grants*** 3.3 4.8Long-Term Care Homes 2.5 3.7

Total—Seven Largest Transfer Payment Programs 42.3 62.6Three Largest Ministry-Delivered Programs:

Teachers’ Pension Plan/Ontario Public Service Retirement Benefits 0.7 1.1Ontario Provincial Police 0.7 1.1Correctional Services 0.6 0.9

Total—Three Largest Ministry-Delivered Programs 2.1 3.1Total—Seven Largest Transfer Payment Programs and Three

Largest Ministry-Delivered Programs44.4 65.7

All Other Program Spending 23.2 34.3Total Program Spending 67.6 100.0* Includes one-time funding of $0.4 billion provided to hospitals in 2004-05.** Includes drug programs delivered by the Ministry of Health and Long-Term Care and Ministry of Community and Social Services.*** Includes base operating grants and special-purpose grants provided to postsecondary institutions.Note: Numbers may not add due to rounding.Source: Ontario Ministry of Finance.


The seven largest transfer payment programs and three largest ministry-delivered programs helpsupport the important goals and priorities of the Province, such as:

Ë supporting the operation of 152 public hospital corporations on 228 sites, including over 40,000nurses;

Ë supporting the public education of two million elementary and secondary school students providedby 120,000 teachers;

Ë paying for medical services provided by almost 22,000 physicians in Ontario, including 10,800family doctors and 11,000 specialists;

Ë providing support to almost 194,000 Ontario Works cases and 226,000 Ontario Disability SupportProgram cases;

Ë funding for over 3,400 prescription drugs and drug products provided primarily to seniors,residents of long-term care homes and social assistance recipients;

Ë supporting over 300,000 full-time university students and more than 150,000 full-time collegestudents through operating grants to colleges and universities;

Ë funding for more than 74,000 beds in almost 600 long-term care homes;

Ë co-sponsoring the pensions for teachers, and sponsoring retirement benefits (including pensions)for Ontario Public Service employees;

Ë providing funding for over 7,500 Ontario Provincial Police staff to support the enforcement ofsafety and security in Ontario’s communities; and

Ë funding for 31 correctional institutions, which house on average almost 7,800 adult offenders atany given time, plus probation, parole and conditional sentence supervision of 56,000 adultsserving their sentences in communities.

To make more efficient use of public tax dollars and help broader public-sector (BPS) partners meettheir commitments, the Province is supporting modernization efforts across the BPS. The governmentwill ensure that the BPS delivers vital programs and services in the most efficient and effective wayand that taxpayers get the best value for the services they care about most.

The government will use this ongoing review to improve its performance in providing timely, efficientand effective service delivery and to seek strategic opportunities for better federal-provincial co-ordination to reduce overlap and duplication.

Controlling Long-Term CostsHelping the government’s BPS partners manage the rate of growth in their spending will also helprefocus investment in public priorities over the long term.

OntarioBuys was created by the Ontario Government in May 2004 with a three-year mandate tofacilitate and accelerate the implementation of integrated supply chain leading practices by Ontario’sBPS.


Over the past 12 months, scores of Ontario BPS institutions have responded, aware that changing theirsupply chains presents a rare opportunity to reduce costs and improve service levels.

In the hospital sector, for example, it is estimated that integrated supply chain leading practices havethe potential to:

Ë redirect over $100 million per year of hospital supply chain costs towards front-line care; and

Ë free up staff time towards improved service levels, including improved patient care.

The Hospital eSupply Chain Project is one of several initiatives that OntarioBuys supports.

Six leading health care organizations—representing 46 hospital facilities—will be automatingcurrently manual supply chain functions through the use of eCommerce and other proventechnologies. OntarioBuys’ investment will allow these hospitals to redirect more than $25 millionover five years away from administrative functions and towards patient services.

Hospital staff currently spend valuable time on supply chain issues and inventory management. Specific examples of the impact of the Hospital eSupply Chain Project include:

Ë Reduced clinical reliance on inefficient paper-based processes, freeing up time for patient care.

Ë Improved back-office processes such as integrated order requisition and approval and electronicinvoice settlement, allowing purchasing department staff to spend less time pushing paperworkand more time supporting clinicians.

Ë Regional integration and consolidation of supply chain processes, allowing hospitals to even moreeffectively use their bulk buying power to reduce the cost of the $2 billion in goods and servicesthey purchase annually.

The Hospital eSupply Chain Project is an example of how OntarioBuys is helping hospitals reducetheir operating costs, improve service levels and support the delivery of better patient care through theadoption of integrated supply chain leading practices.

The government will continue to support its partners in the BPS in finding better and more efficientways to deliver vital public services and equip them with the tools to do so. Important opportunitiesfor efficiencies are being pursued in looking for consolidated purchasing and new approaches toproviding internal administrative and information technology services.

The Province is also supporting modernization through small, transfer payment projects that will gettangible results and can act as a catalyst for broad reform.


For example, children’s aid societies (CASs) work to meet the urgent needs of children who need care. More consistent and reliable information about children in the system would improve the effectivenessof this important work. The government will provide the Ontario Association of Children's AidSocieties with up to $12 million over two years to develop and pilot a single information system thatwill:

Ë make crucial information about children at risk immediately available to agency staff;

Ë provide CASs with online access to a province-wide adoption-matching system; and

Ë streamline administration.

Finally, as of April 1, 2005, the Province’s Auditor General has the legislated authority to carry outvalue-for-money audits of organizations that deliver front-line services, including those in health andeducation. This expanded mandate should help all areas of the public sector manage the Province’sfinances responsibly. More detailed information can be found in Appendix 2, Transparency andAccountability.


ConclusionThe government is making significant progress in promoting Success for Students, Better Health forOntarians, and revitalizing the postsecondary education system to support better jobs and a newgeneration of economic growth. The government is moving forward on the priorities of Ontarians—providing more resources for the Province’s publicly funded schools, making major new investmentsin the postsecondary education and training system, and doing more to help people stay healthy, caringfor them if they become sick, and doing what is necessary to ensure medicare is sustained forgenerations to come.

Through these strategic investments and a disciplined approach to fiscal planning, the Province’sbooks will be in balance no later than 2008-09. A balanced budget will be achieved one year earlier, ifthe reserve is not required in 2007-08.

Responsible fiscal management is about more than just balancing the budget. It is about modernizing,building sustainable public services, and ensuring that programs are delivering their desired outcomesand results in the most cost-effective and efficient manner. To this end, the government performed arigorous review of its programs and services, and has found more than half of the program reviewtarget for 2007-08. More savings are to come.

Enhanced federal support can play a vital role in complementing this fiscal plan and creating the kindof Ontario that the government, and Ontarians in general, want—better health, high-quality education,and modern infrastructure.

It will take a focused and disciplined effort by all of government and its broader public-sector partnersto modernize their activities, put key public services on a sustainable basis, and promote a newgeneration of economic growth.

More detailed fiscal and financial information can be found in Appendix 1, Details on Ontario’sFinances.


PAPER A: APPENDIX 1Details on Ontario’s Finances


Paper A: Details on Ontario’s Finances 51

IntroductionPaper A, Investing in People—Managing Ontario's Finances, provided an update on the government’sprogress on managing change and delivering results, the medium-term fiscal plan, as well as details onhow the structural deficit will be eliminated.

This appendix provides details on Ontario’s recent fiscal performance and other financial information,specifically:

Ë Section I: Ontario’s Interim Performance for 2004-05;

Ë Section II: Support from Gaming for Health Care, the Ontario Trillium Foundation andCommunities;

Ë Section III: Support for Investments for Healthier Ontarians;

Ë Section IV: Potential Risks, Cost Drivers and Contingent Liabilities; and

Ë Section V: Key Financial Tables and Graphs.


Section I: Ontario’s Interim Performance for 2004-05The 2004-05 interim outlook forecasts a deficit of $2,993 million, an in-year improvement of$3,127 million from the $6,120 million deficit projected in the 2004 Budget. This in-year comparisonexcludes the one-time revenue gain associated with eliminating the liability for non-utility generatorpower purchase agreements originally assumed in the 2004 Budget. The 2004-05 interim outlook alsoreflects the September 2004 First Ministers’ health agreement and elimination of the reserve at year-end, as it was not required.

The Ontario Electricity Financial Corporation (OEFC) began receiving actual contract prices forpower from ratepayers effective January 1, 2005, and will no longer incur losses on these powerpurchase contracts with non-utility generators as a result of legislated reforms to the electricity market. These reforms have effectively eliminated the liability associated with these contracts.

2004-05 In-Year Fiscal Performance($ Millions)

BudgetPlan Interim

In-YearChange

Revenue* 74,479 77,137 2,658Expense

Programs 66,695 67,622 927Capital 2,575 2,899 324Interest on Debt 10,329 9,609 (720)

Total Expense 79,599 80,130 531Reserve 1,000 - (1,000)Surplus/(Deficit) (6,120) (2,993) 3,127* Revenue as per 2004-05 Budget Plan excluding one-time revenue gain of $3,881 million related to the projected elimination of the

liability for non-utility generator power purchase agreements in 2004-05.Source: Ontario Ministry of Finance.

Ë Total revenue is estimated to be $2,658 million above the 2004-05 Budget Plan. This is mainlydue to higher Corporations Tax revenues and transfer payments from the Government of Canada.

Ë Total expense increased in-year by $531 million above the 2004-05 Budget Plan, mainly due tohigher levels of spending for health care resulting primarily from the First Ministers’ healthagreement, as well as increased assistance to farmers, partially offset by lower-than-forecastinterest on debt costs.


Ë The $1 billion reserve included in the 2004-05 Budget Plan, to protect against unexpected andadverse changes in the economic and fiscal outlook, was not required—consistent with the role ofthe reserve in prudent budgeting practices.

IN-YEAR REVENUE PERFORMANCETotal revenue is estimated at $77,137 million, a net increase of $2,658 million from the 2004-05Budget Plan forecast. This is mainly due to higher Corporations Tax revenues and transfer paymentsfrom the Government of Canada.

Summary of In-Year Changes to Revenue in 2004-05($ Millions)

Interim2004-05*

Taxation RevenuePersonal Income Tax 274Retail Sales Tax (133)Corporations Tax 1,193Gasoline Tax (45)Land Transfer Tax 129All Other Taxes 47

1,465Government of Canada

First Ministers’ Health Agreement 824All Other Government of Canada 402

1,226Income from Government Enterprises

Ontario Lottery and Gaming Corporation (147)Hydro Successor Corporations 67All Other Government Enterprises 30

(50)Other Non-Tax Revenue 17Total Revenue Changes 2,658* Revenue as per 2004-05 Budget Plan excluding one-time revenue gain of $3,881 million related to the projected elimination of the

liability for non-utility generator power purchase agreements in 2004-05.Source: Ontario Ministry of Finance.


Revenue ChangesË Personal Income Tax revenues are currently estimated to be $274 million above the 2004-05

Budget Plan forecast due to stronger 2004 wages and salaries growth, higher 2003 tax assessmentsand one-time revenue arising from a federal recalculation of tax entitlements for 1995 to 2003.

Ë Retail Sales Tax revenues were $133 million below projection due to weaker 2004 consumerdurable goods expenditure, notably low levels of vehicle sales during 2004.

Ë Corporations Tax revenues are currently estimated to be $1,193 million above the 2004-05 BudgetPlan forecast, primarily due to stronger corporate profit growth in 2004 and an adjustment of$391 million recorded in 2004-05 due to stronger net receipts in respect of past years thanestimated in the 2003-04 Public Accounts.

Ë Gasoline Tax revenues were $45 million below the 2004-05 Budget Plan projection due toreduced consumption corresponding to higher pump prices for gasoline.

Ë Land Transfer Tax revenues were $129 million above the 2004-05 Budget Plan forecast due tocontinued high levels of housing resales and house price increases.

Ë The net change in other taxation revenues combined was $47 million above the 2004-05 BudgetPlan forecast.

Ë The September 2004 First Ministers’ health agreement increased transfers from the Government ofCanada by $824 million.

Ë All other transfers from the Government of Canada combined were $402 million above projection,mainly due to higher federal transfers to Agricorp for income stabilization and other agriculturalsupport programs.

Ë Ontario Lottery and Gaming Corporation net income was $147 million below projection, mainlydue to lower earnings from the border casinos. Business at border casinos continued to beadversely affected by the decreased value of the U.S. dollar, competition from U.S. facilities andperceived border-crossing slowdowns.

Ë Combined net income of Ontario Power Generation Inc. (OPG) and Hydro One Inc. (HOI) was$67 million above the 2004-05 Budget Plan forecast. This is due to higher HOI net income,primarily the result of an Ontario Energy Board decision to allow regulatory recovery of low-voltage service costs.

Ë The combined net income of all other government enterprises was $30 million above projection,mainly due to higher Liquor Control Board of Ontario net income.

Ë The net change in all other non-tax revenues combined was $17 million above the 2004-05 BudgetPlan forecast.


IN-YEAR EXPENSE PERFORMANCETotal expense for 2004-05, at $80,130 million, is $531 million above the level projected in the 2004-05 Budget Plan. This increase was mainly due to increased in-year funding for health care, higherpayments to farmers for agricultural support and increased capital spending, partially offset by lower-than-forecast interest on debt costs.

Summary of In-Year Expense Changes in 2004-05($ Millions)

Interim2004-05

Program Expense Changes:Health—increased spending to reflect the First Ministers’ health agreement 824Agricorp—increased payments to farmers for production insurance and income

stabilization programs369

Agriculture Sector Support—grain and oilseed producer support and otherassistance

259

Graduate Education—endowment to create new fellowships for graduate students 100Power Purchases—lower volumes of electricity purchased than expected (96)Education—transfer of funds to capital expense for technological education

equipment, program start-up delays and higher-than-forecast school boardrevenues from education property taxes

(97)

All Other (Net) (432)Total Program Expense Changes 927

Capital Expense Changes:Postsecondary Institutions—funding for repair and equipment upgrades 250Hospitals—Provincial share of capital costs for 19 projects 184All Other (Net) (110)

Total Capital Expense Changes 324Interest on Debt Change (720)Total In-Year Expense Changes 531Sources: Ontario Ministry of Finance and Ontario Ministry of Public Infrastructure Renewal.


Operating Expense ChangesË As a result of the First Ministers’ health agreement, the Ministry of Health and Long-Term Care

received an additional $824 million in-year. Of the additional $824 million, $194 million wasallocated for the purchase of medical equipment. The remaining $630 million was used primarilyfor investments to reduce wait times and improve access to physicians.

Ë An additional $369 million was attributed to the Ministry of Agriculture and Food for Agricorp toprovide increased funding for income stabilization and production insurance, fully offset fromfederal revenues.

Ë The Ministry of Agriculture and Food received an additional $259 million in-year for grain andoilseed producer support, bovine spongiform encephalopathy (BSE) support, income stabilizationand production insurance, and other assistance.

Ë An additional $100 million was provided in-year to the Ministry of Training, Colleges andUniversities to allow universities to establish endowments that will provide fellowships tooutstanding graduate students.

Ë In-year savings of $96 million for power purchases were realized mainly due to lower-than-expected volumes of electricity purchased by the Ontario Electricity Financial Corporation fromnon-utility generators.

Ë Ministry of Education spending was $97 million lower in-year mainly due to a transfer fromoperating to capital expense to provide additional funding for technological education equipmentin high schools, program start-up delays and a decline in ministry expense to offset higher-than-forecast school board revenues from education property taxes.

Ë All other net changes in operating spending in-year amount to a reduction of $432 million. Thisdecrease is mainly due to drawdowns from the Contingency Fund to accommodate in-yearincreases for programs such as Agriculture Sector Support and Graduate Education; as well asministry underspending in various programs across government that typically occur at year-end.

Ë Interest on debt costs were $720 million below the 2004-05 Budget Plan due to lower-than-forecast interest rates and continued professional and cost-effective debt management.

Capital Expense ChangesË An additional $250 million was provided to the Ministry of Training, Colleges and Universities to

help colleges and universities address the cost of deferred building maintenance and upgradeequipment.

Ë The Ministry of Health and Long-Term Care received an additional $184 million in-year to coverthe Provincial share of 19 hospital capital projects.

Ë All other net changes in capital spending in-year amounted to a reduction of $110 million, mainlydue to underspending in various programs such as the Northern Ontario Heritage Fund and theCanada-Ontario Municipal Rural Infrastructure Program.


STATUS OF THE 2004-05 CHANGE FUNDThe 2004-05 Budget Plan included a $1.0 billion Change Fund to support the government’s plans tochange and improve Ontario’s public services. The Fund provided assistance for projects thatrationalized or better integrated existing programs and services, put in place new systems or processesto reduce long-term costs, or mitigated the demand for services over the long run.

The following table highlights key investments funded through the Change Fund in 2004-05.

Change Fund Investments($ Millions)

Interim2004-05

ANNOUNCED IN THE 2004 BUDGET:Investments for Health CareCommunity Health Services—home care and community mental health 140Family Health Teams 111e-Health Initiatives 78Other Projects (including wait lists and workplace safety) 280

609Other InvestmentsServiceOntario Enhancement 27College Stabilization 25Nutrient Management Financial Assistance Program 5All Other 6

63PROJECTS APPROVED IN-YEAR:Community Reinvestment Fund—One-Time Transition Funding 200Teacher Development Accounts 60All Other 8

268Total Change Fund Investments 940Source: Ontario Ministry of Finance.

The 2004 Budget reported details on key investments totalling $672 million, including $609 millionthat assisted the Ministry of Health and Long-Term Care with its change agenda and $63 million forother investments.


New investments of $268 million, approved and funded in-year from the Change Fund, include:

Ë Community Reinvestment Fund—One-Time Transition Funding: $200 million was approved tofacilitate the transition from the former Community Reinvestment Fund as the Province’s mainfunding model for municipalities, to the Ontario Municipal Partnership Fund (OMPF) (moredetails are provided in Paper B, Achieving Our Potential: Progress Towards a New Generation ofEconomic Growth);

Ë Ministry of Education: $60 million was approved for Teacher Development Accounts to provideone-time funding to offset some of the costs that teachers now bear for their professionaldevelopment, and to support school board collective bargaining; and

Ë All other approvals totalling $8 million included minor projects supporting transformation inManagement Board Secretariat and the Ministries of Children and Youth Services, NorthernDevelopment and Mines, and Transportation.

The remaining $60 million in unallocated funds was applied to reduce the Province’s 2004-05 deficit.


Section II: Support from Gaming for Health Care, theOntario Trillium Foundation and Communities

Provincial proceeds from gaming activities continue to support Provincial priorities, including theoperation of hospitals, charities, communities and the agricultural sector.

Support for Health Care, Charities, and Problem Gambling and Related Programs($ Millions)

Interim2004-05

Plan2005-06

Lotteries, Charity Casinos and Slot Machines at Racetracks RevenueOperation of Hospitals 1,505 1,507Ontario Trillium Foundation 95 100Problem Gambling and Related Programs 36 36

Commercial Casinos RevenueGeneral Government Priorities 334 298

Total 1,970 1,941Sources: Ontario Ministry of Economic Development and Trade and Ontario Ministry of Finance.

Revenue from Lotteries, Charity Casinos and Slot Machines at RacetracksThe Ontario Lottery and Gaming Corporation Act, 1999 requires that net Provincial revenuegenerated from lotteries, charity casinos and racetrack slot machines support services such as theoperation of hospitals, problem gambling and related programs, and funding for charitableorganizations through the Ontario Trillium Foundation.

Ë In 2005-06, it is estimated that $1,507 million in net revenue from lotteries, charity casinos andslot machines at racetracks will be applied to support the operation of hospitals.

Ë The Ontario Trillium Foundation has become one of Canada’s largest grant-making foundations.In 2005-06, the Ontario Trillium Foundation will be provided with $100 million to help buildstrong and healthy communities by contributing to charitable and not-for-profit organizations.

Ë Two per cent of gross slot machine revenue, estimated at $36 million for 2005-06, is allocated toprograms that support problem gambling and related treatment, prevention and research programs.


Benefits from Commercial CasinosË In 2005-06, net Provincial revenue from commercial casinos estimated at $298 million will be

used to support general government priorities including health care and education.

Ë Since the commencement of commercial casino operations, 27,000 direct and indirect jobs havebeen created in Ontario. Commercial casino operations and the additional tourists they attractcontribute an estimated $2.4 billion annually to the Ontario economy.

Other Beneficiaries of Charity Casinos and Slot Machines at RacetracksSupport for the Agricultural Sector and Municipalities*($ Millions)

Interim2004-05

Plan2005-06

Agricultural Sector 301 312Municipalities 75 78Total 376 390* The agricultural sector's share of racetrack slot machine revenue and municipalities' share of slot machine revenue from charity

casinos or racetrack slot facilities is received directly from the Ontario Lottery and Gaming Corporation.Source: Ontario Ministry of Economic Development and Trade.

Ë Twenty per cent of gross revenue from slot machines at racetracks is provided to promote theeconomic growth of the horse-racing industry. Since 1998, this initiative has provided over$1.4 billion to Ontario’s horse-racing industry, a key component of the Province’s agriculturalsector. For 2005-06, additional support is estimated at $312 million.

Ë A portion of gross slot machine revenue estimated at $78 million in 2005-06 will be provided tomunicipalities that host charity casinos and slot operations at racetracks, to help offset localinfrastructure and service costs.


Section III: Support for Investments for HealthierOntariansThe government’s priority of achieving Better Health for Ontarians extends beyond the immediateprograms and services funded by the Ministry of Health and Long-Term Care. Programs and servicesthat support Better Health are also delivered through such ministries as Children and Youth Services;Community and Social Services; Training, Colleges and Universities; and Tourism and Recreation.

Year-over-Year Increases in Programs Contributing to Better Health($ Millions)

Increase2005-06

Ministry of Health and Long-Term Care:Hospitals—will provide 53,200 additional MRI exams from nine new or upgraded

machines and increased hours of operation; almost 2,900 more cancer surgeries;14,000 more cataract and almost 7,000 more cardiac procedures; and over 4,300additional hip and knee joint replacements this year

504

OHIP—establishing 52 Family Health Teams and providing funding for the agreementwith the Ontario Medical Association

335

Ontario Drug Programs—accommodates the growing number of seniors, aging of thepopulation and funding of new drugs

319

Home Care, Community and Mental Health Services—expanding home care to almost50,000 additional Ontarians, including end-of-life care for 4,300 people, andsupporting almost 34,000 additional mental health patients in their communities

292

Long-Term Care Homes—enhancing the quality of care provided to over 74,000residents of long-term care homes by funding 2,000 additional staff, including 600full-time nurses

264

Public Health and Other—primarily to improve capacity to manage infectious diseasecontrol; increase Provincial share of public health unit costs to 65 per cent inJanuary 2006; and enhance public education to help motivate smokers to quit andprovide them with support through the process

122

Total Ministry of Health and Long-Term Care 1,836Ministry of Children and Youth Services: growth in spending on Children’s Mental Health,

Children’s Treatment Centres, and Healthy Babies, Healthy Children programs46

Ministry of Community and Social Services: Ontario Drug Benefit Plan utilization growth forOntario Works and Ontario Disability Support Program recipients

38

Ministry of Training, Colleges and Universities: increased enrolment in medical schools andcollaborative nursing education

44

Ministry of Tourism and Recreation: promotion of physical activity 3Total Increase in Funding 1,967Sources: Ontario Ministry of Finance.


5

10

15

20

25

Revenue* Expense

$ Billions

*Includes transfers from the federal government and the Ontario Health Premium only.**Cumulative change by 2007-08 compared to 2003-04.Note: Numbers may not add due to rounding.Source: Ontario Ministry of Finance.

Cumulative Change in Cumulative Change in HealthHealth--Related Related Revenues Revenues and Expenseand Expense by 2007by 2007--0808

1.2

22.4

2003-04 to 2007-08**

19.7

23.7

Ministry of Health andLong-Term

Care

Other Programs Contributing toBetter Health

In 2005-06, the Ministry of Health and Long-Term Care will spend $1,836 million more than in theprevious year—an amount that exceeds the additional $1,787 million in revenue that will be generatedthis year by funding from the federal government to support health care and the Ontario HealthPremium. If all spending on the broader determinants of health is considered, the Province will bespending $1,967 million more in 2005-06 than in 2004-05.

Health-Related Revenues and ExpenseBy 2007-08, the Province will be investing acumulative total of $23.7 billion in BetterHealth. In support of this investment, theProvince has several key sources of revenuededicated to funding health-relatedinitiatives. By 2007-08, the overallcumulative total revenue from the OntarioHealth Premium and federal transfers tosupport health care will amount to$19.7 billion.

It should be noted that all health-relatedrevenues contribute only a portion of totalMinistry of Health and Long-Term Careoperating costs. In 2005-06, expected health-related revenues including federal transfer payments,Employer Health Tax, Ontario Health Premium and net proceeds from the Ontario Lottery andGaming Corporation are expected to amount to $16.3 billion, or only about 50 per cent of the$32.9 billion required for the Ministry of Health and Long-Term Care this year.


Section IV: Potential Risks, Cost Drivers and ContingentLiabilitiesAs required by the Fiscal Transparency and Accountability Act, 2004, this section highlights some ofthe key sensitivities and risks to the fiscal plan that could follow from unexpected changes ineconomic conditions, program demands or the materialization of liabilities. It should be cautioned thatthese sensitivities and risks, while useful, are only guidelines and can vary depending on the natureand composition of potential risks and liabilities.

THE ONTARIO ECONOMY AND PROVINCIAL REVENUES A growing economy with rising incomes, corporate profits and consumer spending generates higherrevenues to pay for public services. Taxation revenues comprise the largest category of Provincialrevenue. Of the total $81.7 billion in revenues forecast for 2005-06, $57.7 billion or about 71 per centis expected to come from taxation revenues. Eliminating the structural deficit will require the closealignment of spending growth with growth in tax revenues. Three revenue sources within thiscategory—Personal Income Tax, Retail Sales Tax and Corporations Tax—account for about 55 percent of total revenues. However, inherent in any multi-year forecast is uncertainty about the future,making cautious and prudent planning a critical element of any deficit-reduction plan.

The economic assumptions on which the revenue projections are based are described in the Appendixto Paper B, Ontario’s Economic Outlook.

Selected Economic and Revenue Risks and SensitivitiesItem/Key Components 2005-06 Assumption 2005-06 SensitivitiesTotal Revenues - Real GDP 2.0 per cent growth in 2005 $615 million revenue change for each

percentage point change in real GDPgrowth. Can vary significantly depending oncomposition and source of changes in GDPgrowth.

- GDP Deflator 1.9 per cent increase in 2005

- Canadian Interest Rates 2.6 per cent three-monthTreasury Bill rate in 2005

Between $60 million and $310 millionrevenue change in the opposite direction foreach percentage point change in interestrates.

- U.S. Real GDP 3.4 per cent growth in 2005 Between $185 million and $430 millionrevenue change for each percentage pointchange in U.S. real GDP growth.

- Canadian Dollar Exchange Rate 82.8 cents US in 2005 Between $25 million and $110 millionrevenue change in the opposite direction foreach one cent change in the Canadiandollar exchange rate.

Selected Economic and Revenue Risks and SensitivitiesItem/Key Components 2005-06 Assumption 2005-06 Sensitivities


Total Taxation Revenues - Revenue Base1 3.5 per cent growth in 2005-06 $550 million revenue change for each

percentage point change in nominal GDPgrowth. Can vary significantly depending oncomposition and source of changes in GDPgrowth.

- Nominal GDP 3.9 per cent growth in 2005

Personal Income Tax Revenues- Revenue Base 5.2 per cent growth in 2005-06

Key Economic Assumptions - Wages and Salaries 3.6 per cent growth in 2005 $220 million revenue change for each

percentage point change in wages andsalaries growth.

- Employment 1.0 per cent growth in 2005- Unincorporated Business Income

4.1 per cent growth in 2005

Key Revenue Assumptions- Net Capital Gains Income 3.9 per cent growth in 2005 $3 million revenue change for each

percentage point change in net capital gainsincome growth.

- RRSP Deductions 4.4 per cent growth in 2005 $14 million revenue change in the oppositedirection for each percentage point changein RRSP deductions growth.

- 2004 Tax-Year Assessments $18.8 billion $190 million revenue change for eachpercentage point change in 2004 PersonalIncome Tax assessments.2

Retail Sales Tax Revenues - Revenue Base 3.6 per cent growth in 2005-06Includes:- Taxable Household Spending 3.1 per cent growth in 2005-06- Other Taxable Spending 4.2 per cent growth in 2005-06

Key Economic Assumptions- Retail Sales 4.0 per cent growth in 2005- Nominal Consumption Expenditure

4.5 per cent growth in 2005 $90 million revenue change for eachpercentage point change in nominalconsumption expenditure growth.



Corporations Tax Revenues- Revenue Base 1.2 per cent growth in 2005-06- Corporate Profits 3.0 per cent growth in 2005 $65 million revenue change for each

percentage point change in pre-taxcorporate profit growth.

- 2004-05 Tax Assessment Refunds3

$1.4 billion payable in 2005-06 $14 million revenue change in the oppositedirection for each percentage point changein 2004-05 refunds.

- 2004-05 Tax Payments Upon Filing

$0.6 billion receivable in2005-06

$6 million revenue change for eachpercentage point change in 2004-05payments upon filing or assessmentpayments.

- 2004-05 Tax Assessment Payments

$0.6 billion receivable in2005-06

Employer Health Tax Revenues- Revenue Base 3.0 per cent growth in 2005-06- Wages and Salaries 3.6 per cent growth in 2005 $30 million revenue change for each

percentage point change in wages andsalaries growth.

Ontario Health Premium Revenues- Revenue Base 3.9 per cent growth in 2005-06- Personal Income 3.8 per cent growth in 2005 $20 million revenue change for each

percentage point change in personal incomegrowth.

Gasoline Tax Revenues- Revenue Base 1.0 per cent growth in 2005-06- Gasoline Pump Prices 82 cents per litre $5 million revenue change in the opposite

direction for each cent per litre change ingasoline pump prices.

Fuel Tax Revenues- Revenue Base 2.1 per cent growth in 2005-06- Real GDP 2.0 per cent growth in 2005 $10 million revenue change for each

percentage point change in real GDPgrowth.



Land Transfer Tax Revenues- Revenue Base 0.4 per cent decline in 2005-06- Housing Resales 3.7 per cent decline in 2005 $10 million revenue change for each

percentage point change in both the numberand prices of housing resales.

- Resale Prices 1.1 per cent growth in 2005

Health and Social Transfers- Canada-wide Revenue Base $27.2 billion in 2005-06- Ontario Revenue Share 37.3 per cent in 2005-06- Ontario Population Share 38.9 per cent in 2005-06 $40 million revenue change for each tenth

of a percentage point change in populationshare.

- Ontario Basic Federal PIT Share 44.3 per cent in 2005-06 $10 million revenue change in the oppositedirection for each tenth of a percentagepoint change in Basic Federal PersonalIncome Tax base share.

1. Revenue base is revenue excluding the impact of measures, adjustments for past Public Accounts estimate variances and otherone-time factors.

2. Ontario 2004 Personal Income Tax is a forecast estimate because 2004 tax returns are currently being assessed by the CanadaRevenue Agency.

3. Corporations Tax refunds arising during 2004-05 are still subject to considerable uncertainty because a very high proportion ofcorporations have until June 30, 2005 to file their 2004 tax returns.


EXPENSE RISKS AND SENSITIVITIESMany programs delivered by the Province are subject to potential risks and cost drivers such asutilization growth or enrolment and caseload changes. The following sensitivities are based onexpense averages for key program areas and might change depending on the nature and compositionof the potential risk.

Selected Expense Risks and SensitivitiesProgram/Sector 2005-06 Assumption 2005-06 SensitivitiesHealth Annual growth of 5.9 per cent One per cent change in health:

$329 million.Hospitals Annual growth of 4.7 per cent One per cent change in hospital funding:

$120 million.Drug Programs Annual growth of 12 per cent

(seniors)One per cent change in utilization of all drugprograms: $36 million (seniors and socialassistance recipients).

Home Care/CommunityServices

Over 15.5 million hours ofhomemaking and support services;8.5 million nursing and professionalvisits

One per cent change in hours ofhomemaking and support services: $4 million.One per cent change in nursing andprofessional visits: $6 million.

Long-Term Care Homes More than 74,000 long-term carehome beds

Annual average Provincial operating costper bed, after resident co-payment revenue,in a long-term care home is $36,000. Oneper cent change in number of beds: $27 million.

Elementary and SecondarySchools*

Almost two million average dailypupil enrolment

One per cent enrolment change:$160 million.

College Students 151,000 full-time students One per cent enrolment change: $7 million.University Students 280,000 full-time undergraduate

studentsOne per cent enrolment change:$19 million.

Ontario Works* 194,000 average annual caseload One per cent caseload change: $15 million.Ontario Disability Support

Program*226,000 average annual caseload One per cent caseload change: $23 million.

Correctional System 2.8 million adult inmate days peryear

Average cost $155 per inmate per day. One per cent change in inmate days:$4 million.

Interest on Debt Average cost of borrowing isforecast to be approximately 5.4 percent.

The impact of a 100 basis-point change inborrowing rates is forecast to beapproximately $250 million.

* Based on 2004-05.


COMPENSATION COSTSCompensation costs and wage settlements are key cost drivers and have a substantial impact on boththe finances of broader public-sector partners and the Province.

SectorCost of 1%

salary increase Size of SectorOHIP Payments to Physicians† $70 million Almost 22,000 physicians in Ontario,

comprising 10,800 family doctors and 11,000specialists.

Hospital Nurses* $34 million Over 40,000 nurses in hospitals.Elementary and Secondary School Staff** $119 million Over 180,000 staff including teachers,

principals, administrators, support andmaintenance staff.

Ontario Public Service*** $50 million Over 64,000 public servants.† Based on 2005-06.* Based on 2003-04.** One per cent increase in salary benchmarks in Grants for Student Needs based on 2004-05 school year.*** Based on 2004-05, reflects total compensation costs.

CONTINGENT LIABILITIESContingent LiabilitiesIn addition to the key demand sensitivities and economic risks to the fiscal plan, there are additionalrisks stemming from the government’s contingent liabilities. Whether these contingencies will resultin actual liabilities for the Province is beyond the direct control of the government. Losses couldresult from legal settlements, defaults on projects, and loan and funding guarantees. Provisions forlosses that are likely to occur and that can be reasonably estimated, are expensed and reported asliabilities in the Province’s financial statements. Significant contingent liabilities as disclosed in the2003-04 Annual Report and Consolidated Financial Statements are described below. This disclosurewill be updated as at March 31, 2005 in the 2004-05 Annual Report and Consolidated FinancialStatements.

Ontario Nuclear Funds AgreementThe Province has certain responsibilities with respect to nuclear used fuel waste management andnuclear station decommissioning. The Province, Ontario Power Generation Inc. (OPG), a whollyowned subsidiary, and certain subsidiaries of OPG are parties to the Ontario Nuclear Funds Agreement(ONFA), to establish, fund and manage segregated funds to ensure sufficient funds are available topay the costs of nuclear station decommissioning and nuclear used fuel waste management. UnderONFA, the Province is liable to make payments should the cost estimate for nuclear used fuel wastemanagement rise above specified thresholds for a fixed volume of used fuel. As well, under ONFA,the Province guarantees a return of 3.25 per cent over the Ontario Consumer Price Index for thenuclear used fuel waste management fund. The Province has also provided a direct Provincial


guarantee to the Canadian Nuclear Safety Commission on behalf of OPG for up to $1.5 billion, whichrelates to the portion of the decommissioning and waste management obligations not funded by thesegregated funds.

Obligations Guaranteed by the ProvinceThe Province provides guarantees on loans on behalf of various parties. The authorized limit for loansguaranteed by the Province as at March 31, 2004 was $4.4 billion. The outstanding loans guaranteedand other contingencies amounted to $3.4 billion at March 31, 2004. A provision of $397 millionbased on an estimate of the likely loss arising from guarantees under the Student Support Programshas been expensed and is reflected in the 2003-04 Annual Report and Consolidated FinancialStatements of the Province.

Social Housing—Loan Insurance AgreementsThe Province is liable to indemnify and reimburse the Canada Mortgage and Housing Corporation forany net costs, including any environmental liabilities incurred as a result of project defaults, for allnon-profit housing projects in the Provincial portfolio. At March 31, 2004, there were $9.0 billion inmortgage loans outstanding.

Claims Against the CrownThere are claims outstanding against the Crown arising from legal action, either in progress orthreatened, in respect of aboriginal land claims, breach of contract, damages to persons and property,and like items. At March 31, 2004, there were 80 claims outstanding against the Crown that were foramounts over $50 million.


Section V: Key Financial Tables and GraphsThe following pages provide details on Ontario’s Finances—both historical and projections over themedium term.

Key tables consist of:

Ë Medium-Term Fiscal Plan and Outlook (2004-05 to 2008-09);

Ë Fiscal Outlook (2004-05 to 2005-06);

Ë Details on Provincial Revenue (2001-02 to 2005-06);

Ë Details on Provincial Operating Expense, by Ministry (2001-02 to 2005-06);

Ë Details on Provincial Capital Expense, by Ministry (2001-02 to 2005-06);

Ë Schedule of Net Investment in Capital Assets (2005-06);

Ë Details on Capital Investment (2005-06);

Ë Summary of Consolidated Government Organizations (2005-06); and

Ë Ten-Year Review of Selected Financial and Economic Statistics (1996-97 to 2005-06).

Key graphs consist of:

Ë Composition of Revenue (2005-06);

Ë Composition of Total Expense (2005-06);

Ë Composition of Program Expense (2005-06); and

Ë Composition of Capital Expense (2005-06).


Medium-Term Fiscal Plan and Outlook Table A1 ($ Billions)

Interim2004-05

Plan2005-06

Outlook2006-07 2007-08 2008-09

Revenue 77.1 81.7 84.8 88.5 92.2Expense

Programs 67.6 71.0 73.3 75.9 77.9Capital 2.9 2.7 2.5 2.1 2.1Interest on Debt 9.6 9.8 10.0 10.4 10.7

Total Expense 80.1 83.5 85.7 88.5 90.7Surplus/(Deficit) Before Reserve (3.0) (1.8) (0.9) 0.0 1.5Reserve - 1.0 1.5 1.5 1.5Surplus/(Deficit) (3.0) (2.8) (2.4) (1.5) 0.0Net Debt† 142.2 146.0 149.7 152.6 153.8Accumulated Deficit† 127.2 130.0 132.4 133.9 133.9Gross Domestic Product (GDP) at Market

Prices517.6 538.0 562.6 592.2 623.6

Net Debt as a per cent of GDP 27.5 27.1 26.6 25.8 24.7Accumulated Deficit as a per cent of GDP 24.6 24.2 23.5 22.6 21.5† Net Debt is calculated as the difference between liabilities and financial assets. The annual change in Net Debt is equal to the

Surplus/Deficit plus the change in tangible capital assets. Accumulated Deficit is calculated as the difference between liabilities andfinancial and tangible capital assets. The annual change in the Accumulated Deficit is equal to the Surplus/Deficit.

Note: Numbers may not add due to rounding.


2005-06 Fiscal Outlook Table A2($ Millions)

Interim2004-05

Plan2005-06

Change$ Millions Per cent

Revenue 77,137 81,687 4,550 5.9Expense

Programs 67,622 71,014 3,392 5.0Capital 2,899 2,673 (226) (7.8)Interest on Debt 9,609 9,796 187 1.9

Total Expense 80,130 83,483 3,353 4.2Surplus/(Deficit) Before Reserve (2,993) (1,796) 1,197 (40.0)Reserve - 1,000 1,000 -Surplus/(Deficit) (2,993) (2,796) 197 (6.6)Net Debt† 142,228 146,017 3,789 2.7Accumulated Deficit† 127,181 129,977 2,796 2.2† Net Debt is calculated as the difference between liabilities and financial assets. The annual change in Net Debt is equal to the

Surplus/Deficit plus the change in tangible capital assets. Accumulated Deficit is calculated as the difference between liabilitiesand financial and tangible capital assets. The annual change in the Accumulated Deficit is equal to the Surplus/Deficit.



Revenue Table A3($ Millions)

2001-02 2002-03Actual

2003-04Interim2004-05

Plan2005-06

Taxation RevenuePersonal Income Tax 19,097 18,195 18,301 19,095 20,026Retail Sales Tax 13,803 14,183 14,258 14,903 15,475Corporations Tax 6,646 7,459 6,658 9,513 9,248Employer Health Tax 3,502 3,589 3,753 3,886 4,033Ontario Health Premium - - - 1,749 2,422Gasoline Tax 2,192 2,306 2,264 2,283 2,308Fuel Tax 659 682 681 719 733Tobacco Tax 703 1,183 1,350 1,466 1,511Land Transfer Tax 665 814 909 1,056 1,056Electricity Payments-In-Lieu of Taxes 387 711 627 509 656Other Taxes 371 429 347 284 258

48,025 49,551 49,148 55,463 57,726Government of Canada*

Canada Health and Social Transfer (CHST) 5,831 7,346 7,345 - -Canada Health Transfer (CHT) - - - 5,636 7,127Canada Social Transfer (CST)** - - - 2,917 3,311CHST Supplements 380 191 577 775 584Social Housing 524 525 528 521 520Infrastructure Programs - 97 150 222 293Wait Times Reduction Fund - - - 242 243Medical Equipment Funds 190 - 192 387 194Other Government of Canada 829 735 1,101 1,324 901

7,754 8,894 9,893 12,024 13,173Income from Investment in Government Business Enterprises

Ontario Lottery and Gaming Corporation 2,255 2,288 2,106 1,970 1,941Liquor Control Board of Ontario 904 939 1,045 1,140 1,186Ontario Power Generation Inc. and Hydro One Inc. 179 717 (17) 402 887Other Government Enterprises 7 (2) (64) 2 5

3,345 3,942 3,070 3,514 4,019Other Non-Tax Revenue

Reimbursements 1,592 1,111 1,206 1,258 1,319Electricity Debt Retirement Charge - 889 1,000 1,009 1,018Vehicle and Driver Registration Fees 941 982 985 991 1,017Power Sales 815 635 510 610 961Other Fees and Licences 474 606 594 494 510Liquor Licence Revenue 530 530 488 493 502Net Reduction of Power Purchase Contract Liability - 161 104 236 396Sales and Rentals 344 560 532 355 369Royalties 224 304 248 268 236Miscellaneous Other Non-Tax Revenue 2,490 726 622 422 441

7,410 6,504 6,289 6,136 6,769Total Revenue 66,534 68,891 68,400 77,137 81,687* Health Reform Fund included in CHST in 2003-04 and CHT in 2004-05.** Includes 2005 Federal Budget additional Early Learning and Child Care revenues of $272 million in 2005-06.


Operating Expense Table A4 ($ Millions)

Ministry 2001-02 2002-03Actual

2003-04Interim2004-05

Plan2005-06

Agriculture and Food 456 598 673 733 564One-Time and Extraordinary Costs 319 18 - 444 -

Attorney General 995 1,052 1,199 1,183 1,199Board of Internal Economy 124 146 196 149 167Children and Youth Services 2,244 2,431 2,640 2,856 3,196Citizenship and Immigration 59 53 52 56 63Community and Social Services 5,807 5,842 5,995 6,393 6,595Community Safety and Correctional Services 1,513 1,656 1,666 1,741 1,753Consumer and Business Services 172 178 182 201 178Culture 279 331 303 295 275Democratic Renewal Secretariat - - - 2 4Economic Development and Trade 221 242 253 279 688Education 8,354 8,998 9,665 10,526 11,267

Teachers’ Pension Plan (TPP) 42 238 235 240 290Energy 367 144 116 138 148Environment 265 237 261 310 314Executive Offices 19 20 24 19 19Finance - Own Account 1,197 1,092 1,255 1,141 1,126

Interest on Debt 10,337 9,694 9,604 9,609 9,796Community Reinvestment Fund/Ontario Municipal

Partnership Fund557 622 651 626 662

Community Reinvestment Fund One-Time TransitionFunding

- - - 233 -

Electricity Consumer Price Protection Fund - 665 253 - -Power Purchases 815 786 797 850 961

Health and Long-Term Care 23,923 25,800 28,036 31,112 32,948SARS-related and Major One-Time Health Costs - - 824 - -

Intergovernmental Affairs 6 9 6 13 8Labour 110 123 117 132 146Management Board Secretariat 246 186 214 687 469

Retirement Benefits 63 102 309 493 514Contingency Fund - - - - 557

Municipal Affairs and Housing 1,136 636 662 771 683Native Affairs Secretariat 13 16 15 18 14Natural Resources 438 454 516 485 492Northern Development and Mines 75 73 76 79 111Office of Francophone Affairs 5 3 3 4 4Public Infrastructure Renewal 15 33 18 20 30Tourism and Recreation 143 135 209 184 163Training, Colleges and Universities 3,290 3,471 3,883 4,298 4,781Transportation 664 814 800 911 975Year-End Savings - - - - (350)Total Operating Expense 64,269 66,898 71,708 77,231 80,810


Capital Expense† Table A5($ Millions)

Ministry 2001-02 2002-03Actual

2003-04Interim2004-05

Plan2005-06

Agriculture and Food 29 68 1 4 11Attorney General 46 43 24 37 75Children and Youth Services 6 7 - 5 109Community and Social Services 25 16 10 20 33Community Safety and Correctional Services 88 66 47 32 48Consumer and Business Services - 1 1 4 5Culture 14 42 24 67 115Economic Development and Trade 19 21 31 77 82Education 17 10 15 50 6Energy 50 46 53 53 49Environment 20 13 4 7 13Finance 11 8 5 5 5Health and Long-Term Care 205 339 358 531 339Management Board Secretariat* 28 3 (33) (5) (18)Municipal Affairs and Housing 12 20 206 273 392Native Affairs Secretariat 3 2 - 2 3Natural Resources 70 72 111 74 53Northern Development and Mines 371 391 332 357 421Public Infrastructure Renewal - 4 18 46 57

Capital Contingency Fund - - - - 175Tourism and Recreation 9 55 51 65 93Training, Colleges and Universities 49 71 120 421 135Transportation 818 578 797 774 622Year-End Savings - - - - (150)Total Capital Expense 1,890 1,876 2,175 2,899 2,673† Starting in 2002-03, major tangible capital assets owned by Provincial ministries (land, buildings and transportation infrastructure) are

accounted for on a full accrual accounting basis. Other tangible capital assets owned by Provincial ministries will continue to beaccounted for as expense in the year of acquisition or construction. All capital assets owned by consolidated governmentorganizations are accounted for on a full accrual basis.

* Ministries’ contributions for investments in Provincially owned land and buildings are recorded as an expense by the contributingministries. Starting in 2002-03, any resulting adjustment to expense from the capitalization and amortization of most of theseProvincially owned land and buildings is recorded in Management Board Secretariat.

Sources: Ontario Ministry of Finance and Ontario Ministry of Public Infrastructure Renewal.


Schedule of Net Investment in Capital Assets Table A6($ Millions)

2005-06 Plan

Land andBuildings

TransportationInfrastructure

GovernmentOrganizations’Capital Assets Total

Acquisition/Construction of MajorTangible Capital Assets 160 1,131 526 1,817

Amortization of Provincially OwnedMajor Tangible Capital Assets (84) (534) (206) (824)

Net Investment in Capital Assets 76 597 320 993Source: Ontario Ministry of Public Infrastructure Renewal.

Gross Capital Investment Table A7 ($ Millions)

Plan2005-06

TransportationTransit 513Highways 1,135Other Transportation 110

1,758Health and Long-Term Care 349Postsecondary Education 132Water/Environment 292Municipal and Local Infrastructure* 535Justice 123Other 477Total Gross Capital Investment** 3,666Less: Net Investment in Capital Assets 993Total Capital Expense 2,673* Municipal and local water and wastewater infrastructure investments are included in the Water/Environment sector.** Total gross capital investment includes flow-throughs of $531 million.Source: Ontario Ministry of Public Infrastructure Renewal.


SUMMARY OF CONSOLIDATED GOVERNMENT ORGANIZATIONSThe government carries out a number of activities through government organizations. Theseorganizations provide, in some circumstances, programs directly to the public and in other casesservices to the government itself.

Table A8 has been added to the Appendix this year to provide the public with additional informationon the extent of activities carried out through these organizations. It reflects the total revenues andexpenses related to the activities of these organizations and the extent to which they receive transferpayments from the government to fund these activities. The net increase/(decrease) to Provincialdeficit reflects, for those organizations offering services directly to the public, the net grant to supportthese activities; and for those organizations offering services to the government, the net costs ofservices used by the government during the year.

Summary of Consolidated Government Organizations* Table A8 ($ Millions)

Ministry/Agency

2005-06 Plan

Agency**Transfers

fromProvince

Included inAgency

Revenue

Net Increase/(Decrease) to

ProvincialDeficit

TotalRevenue

TotalExpense

Net (Income)/

LossAgriculture and Food

Agricorp 404 376 (28) 138 110Attorney General

Legal Aid Ontario 290 310 20 254 274Culture

Ontario Science Centre 38 39 1 18 19Ontario Trillium Foundation 106 106 - 100 100Royal Ontario Museum 23 25 2 19 21

Economic Development and TradeOntario Immigrant Investor Corporation 12 5 (7) - (7)

EducationEducation Quality and Accountability Office 40 40 - 40 40

EnergyIndependent Electricity System Operator 154 152 (2) - (2)Ontario Energy Board 32 32 - - -


Ministry/Agency

2005-06 Plan

Agency**Transfers

fromProvince

Included inAgency

Revenue


ProvincialDeficit

TotalRevenue

TotalExpense

Net (Income)/

Loss


FinanceOntario Financing Authority† 25 25 - 17 17Ontario Securities Commission†† 57 65 8 - 8Ontario Strategic Infrastructure Financing

Authority103 124 21 - 21

Health and Long-Term CareCancer Care Ontario 479 473 (6) 449 443Smart Systems for Health 107 107 - 98 98

Management Board Secretariat (MBS)Ontario Realty Corporation (ORC)† 51 50 (1) 50 49ORC Operating as Agent for the

Province† *** 600 584 (16) 548 532Municipal Affairs and Housing

Ontario Housing Corporation 118 79 (39) 116 77Northern Development and Mines

Northern Ontario Heritage Fund Corporation 68 116 48 61 109Tourism and Recreation

Metropolitan Toronto Convention Centre 45 41 (4) - (4)Ontario Place Corporation 18 19 1 4 5Ontario Tourism Marketing Partnership

Corporation50 55 5 49 54

Training, Colleges and UniversitiesOntario Educational Communications

Authority (TVOntario)79 76 (3) 59 56


Ministry/Agency

2005-06 Plan

Agency**Transfers

fromProvince

Included inAgency

Revenue


ProvincialDeficit

TotalRevenue

TotalExpense

Net (Income)/

Loss


TransportationGreater Toronto Transit Authority (GO

Transit)538 351 (187) 311 124

Toronto Area Transit Operating Authority 45 3 (42) 45 3Total 3,482 3,253 (229) 2,376 2,147* The Ontario Electricity Financial Corporation (OEFC) has a projected excess of revenue over expense of $713 million for 2005-06.

As OEFC's revenues are dedicated to managing and retiring the debt and other liabilities of the former Ontario Hydro, OEFC is not included in this table as its activities are not comparable to the activities of other government organizations.

** The revenues and expenses of government organizations, except for government business enterprises, are consolidated on a line-by-line basis with ministry revenues and expenses. Adjustments are made to present the accounts of these governmentorganizations on a basis consistent with the Province’s accounting policies, e.g., conforming the accounting for capital grantsreceived by an organization to the Province’s accounting policy. These adjustments have been made to the agencies’ revenues andexpenses above except for interest revenue and interest expense adjustment. Upon consolidation, adjustments are made toeliminate significant inter-organization transactions, e.g., transfers received from the Province.

*** ORC maintains several operating bank accounts that are held "in trust", administered on behalf of MBS, and relate directly to theoperation of MBS-owned and -leased properties or services provided to other ministries or agencies of the Ontario Government. The activities reported under ORC Operating as Agent for the Province are shown separately as they will not be reflected on ORC'sfinancial statements. Transfers to ORC reflect the accommodation charges and contributions received from ministries and agenciesfor leased premises or buildings owned by the Province and managed by ORC. The Net Increase to Provincial Deficit for ORCrepresents the costs of these leased premises and the operating costs of the Provincially owned assets and the costs of other realtyactivities incurred on behalf of ministries and agencies by ORC as the Province's realty service provider. The planned expendituresactually reside in individual Ministry allocations or agency budgets in either the current or prior years.

† Organizations offering service to the government.†† The Ontario Securities Commission is a fully self-funded agency. OSC fees are set over a three-year period to recover any deficits

or adjust for any surpluses so that the fees set by the OSC accurately reflect the Commission’s cost of operations.


Ten-Year Review of Selected Financial and Economic Statistics($ Millions)

1996-97 1997-98 1998-99Financial TransactionsRevenue 49,714 52,782 56,050Expense

Programs 45,400 45,568 46,821Capital* 2,612 2,451 2,215Interest on Debt 8,607 8,729 9,016

Total Expense 56,619 56,748 58,052Surplus/(Deficit) Before Reserve (6,905) (3,966) (2,002)Reserve - - -Surplus/(Deficit) (6,905) (3,966) (2,002)Net Debt† 108,769 112,735 114,737Accumulated Deficit† 108,769 112,735 114,737Gross Domestic Product (GDP) at Market Prices 338,173 359,353 377,897Personal Income 276,303 289,537 304,652Population—July (000s) 11,083 11,228 11,367Net Debt per Capita (dollars) 9,814 10,041 10,094Personal Income per Capita (dollars) 24,930 25,787 26,801Total Expense as a per cent of GDP 16.7 15.8 15.4Interest on Debt as a per cent of Revenue 17.3 16.5 16.1Net Debt as a per cent of GDP 32.2 31.4 30.4Accumulated Deficit as a per cent of GDP 32.2 31.4 30.4* Starting in 2002-03, major tangible capital assets owned by Provincial ministries (land, buildings and transportation infrastructure)

are accounted for on a full accrual accounting basis. Other tangible capital assets owned by Provincial ministries will continue to beaccounted for as expense in the year of acquisition or construction. All capital assets owned by consolidated governmentorganizations are accounted for on a full accrual basis.

† Net Debt is calculated as the difference between liabilities and financial assets. The annual change in Net Debt is equal to theSurplus/Deficit plus the change in tangible capital assets. Accumulated Deficit is calculated as the difference between liabilities andfinancial and tangible capital assets. The annual change in the Accumulated Deficit is equal to the Surplus/Deficit.

Sources: Ontario Ministry of Finance and Statistics Canada.


Table A9

1999-00 2000-01 2001-02 2002-03Actual

2003-04Interim

2004-05Plan

2005-06

65,042 66,294 66,534 68,891 68,400 77,137 81,687

48,460 51,396 53,932 57,204 62,104 67,622 71,0144,887 2,123 1,890 1,876 2,175 2,899 2,673

11,027 10,873 10,337 9,694 9,604 9,609 9,79664,374 64,392 66,159 68,774 73,883 80,130 83,483

668 1,902 375 117 (5,483) (2,993) (1,796)- - - - - - 1,000

668 1,902 375 117 (5,483) (2,993) (2,796)134,398 132,496 132,121 132,647 138,557 142,228 146,017134,398 132,496 132,121 118,705 124,188 127,181 129,977409,020 440,759 453,931 479,556 494,501 517,614 537,958321,702 347,653 360,496 369,606 379,216 392,858 407,70011,506 11,685 11,898 12,102 12,257 12,393 12,55111,681 11,339 11,104 10,961 11,304 11,476 11,63427,959 29,752 30,299 30,541 30,939 31,700 32,483

15.7 14.6 14.6 14.3 14.9 15.5 15.517.0 16.4 15.5 14.1 14.0 12.5 12.032.9 30.1 29.1 27.7 28.0 27.5 27.132.9 30.1 29.1 24.8 25.1 24.6 24.2


Retail Sales Tax

19% $15.5B

Personal Income Tax25% $20.0B

Employer Health Tax5% $4.0B Corporations Tax

11% $9.2B

Gasoline and Fuel Taxes4% $3.0B

Other Taxes4% $3.5B

Other Non-Tax Revenue8% $6.8B

Income fromGovernment Enterprises

5% $4.0B

Composition of RevenueComposition of Revenue20052005--0606


OntarioHealth Premium

3% $2.4B Federal Payments

16% $13.2B

Composition of Total Composition of Total ExpenseExpense20052005--0606

Training, Collegesand Universities

6% $4.9B

Intereston Debt

12% $9.8B

Justice4% $3.1B

Children’s and Social Services

12% $9.9B

Health Care40% $33.3B

Resources,General Government

and Other12% $10.9B

* Includes Teachers’ Pension PlanNote: Numbers may not add due to rounding.

Education*14% $11.6B


Composition of Composition of Program ExpenseProgram Expense20052005--0606

* Includes Teachers’ Pension PlanNote: Numbers may not add due to rounding.

Education*16% $11.6B

Justice4% $3.0B


14% $9.8B


Resources,General Government

and Other13% $9.0B

Training, Collegesand Universities

7% $4.8B

Composition of Capital Composition of Capital ExpenseExpense20052005--0606


Education and Training

5% $0.1B

Justice5% $0.1B

Environment, Resourcesand Economic Development

69% $1.9B


General Governmentand Other3% $0.1B


5% $0.1B


PAPER A: APPENDIX 2Transparency and Accountability


Paper A: Transparency and Accountability 87

Transparency and AccountabilityTransparency is the basis of an accountable, democratic government. To participate effectively in ademocratic process, citizens must be able to see fully and clearly what their government is doing.Transparent communication with citizens involves not just making information available, but alsoensuring its integrity and clarity. Because governments often deal with issues that are by naturecomplicated, a commitment to transparency is both important and challenging.

Accountability involves setting out expectations about the outcomes to be achieved; monitoring andreporting publicly on progress; using that information to improve performance; and working toachieve results and taking responsibility for them. Accountability relationships exist betweengovernments and the electorate; between politicians and the public service; between managers andstaff; and between service funders, providers and their clients. For taxpayers, accountability works toensure that tax dollars are spent on achieving key results as efficiently as possible.

The government established a new emphasis on transparency and accountability and has madeprogress over the past year.

Ë The Fiscal Transparency and Accountability Act, 2004 (FTAA) sets new standards for how thegovernment plans to allocate resources, and how and when it reports to the people on the state ofthe Province’s finances. In particular, the FTAA requires two new and different reports. A long-term analysis within two years of an election and a pre-election report before every generalelection will provide the public with the kind of information they need to participate more fully inpolicy debates.

Ë In line with Public Sector Accounting Board (PSAB) standards of the Canadian Institute ofChartered Accountants, the Province’s financial statements will incorporate the bottom-linefinancial results of hospitals, school boards and colleges beginning with the 2005-06 PublicAccounts.

Ë Modern Controllership, a training and development initiative that has been evolving over the lastseveral years, requires managers and financial specialists across the Ontario Public Service towork in a co-ordinated way to prioritize, plan and meet operational goals.

Ë A government-wide, results-based approach to planning has been developed to invest in thepriorities of Ontario while still living within Ontario’s means. Program results are integrated intoplanning and decision-making, and regular reports are made to the public on progress towardsachieving their goals.

Ë Legislation passed in 2004 gives the Provincial Auditor, now called the Auditor General, theauthority to carry out value-for-money audits of organizations that deliver front-line services,including health care and education.


CONSOLIDATING HOSPITALS, SCHOOLS AND COLLEGES In its 2004 Budget, the government announced it would expand its financial reporting to includehospitals, schools and colleges in its financial statements starting with the 2005-06 Public Accountsand the subsequent 2007 Ontario Budget, reflecting PSAB’s new standard defining thoseorganizations that should be included in the government’s financial statements. With this change in itsfinancial reporting, the bottom-line financial results of some 105 school boards and school authorities,24 colleges and 152 hospitals will now be reflected in the Province’s financial statements. Up untilnow, the only information included in the Province’s books with respect to these organizations was thefunds transferred to them. Now, their actual expenditures, investments and borrowings will bereflected on a bottom-line basis in the Province’s financial statements. The Province will also provideadditional information on the major assets, liabilities, revenues and expenses of these sectors in theschedules supporting the Province’s financial statements.

Value-for-Money AuditsThe Office of the Auditor General is an independent body that contributes to accountability ingovernment. Auditors with professional accounting designations assess government programs andsystems to help improve the government’s delivery of programs and ensure that Ontario taxpayersreceive value for money. The Auditor General’s annual reports are a catalyst for action because theymake recommendations to overcome identified problems and report the extent of commitment bymanagement to take action. These public reports promote better accountability and governance.

As of April 1, 2005, the Auditor General possesses expanded powers to conduct value-for-moneyaudits of institutions in the broader public sector. This new mandate includes school boards,universities, colleges, hospitals and all Crown-controlled corporations including Hydro One, OntarioPower Generation and their subsidiaries. More public-sector organizations will be reviewed to ensurethat Ontarians are getting value for the money they invest in their public services. The AuditorGeneral’s reports are tabled in the legislature and made available to the public.

Value-for-money audits are motivated by two principal considerations:

Ë whether money was spent with due regard for economy and efficiency; and

Ë whether appropriate procedures are in place to measure and report on the effectiveness of theprograms.

Value-for-money audits deal with the administration of programs and activities, including majorinformation systems. It is not part of the Auditor General’s mandate to measure, evaluate or report onthe effectiveness of programs or to develop performance measures or standards. These functions arethe responsibility of management. The Auditor General is responsible for reporting whethermanagement has carried out these functions satisfactorily.

Paper A: Transparency and Accountability 89

CONCLUSIONDemocracy depends on a knowledgeable citizenry whose access to a range of information enablesthem to participate more fully in public life, to help determine priorities for public spending, and tohold their public officials accountable. By combining integrity and clarity of information withmonitoring and reporting on progress to improve results, the government is committed to a fiscalpolicy that is transparent and accountable.

In implementing these changes in its financial reporting and auditing practices, the Province isimproving the transparency and accountability of government in Ontario.


PAPER BAchieving Our Potential: Progress Towards a

New Generation of Economic Growth


Paper B: Progress Towards a New Generation of Economic Growth 93

IntroductionToday, Ontario provides a quality of life that is among the highest in the world. There is, however, noroom for complacency. In an era where ideas and technology spread rapidly over borders, wherebarriers to trade are falling and where global competition is fierce, the challenge of improving livingstandards is significant. In Ontario’s case, this challenge is compounded by the recent strengtheningof the Canadian dollar and the emergence of new competitors in countries with lower production costs.

Productivity gains are the key to improving living standards—the government’s primary economicobjective. The government recognizes that the private sector is the principal source of economicgrowth and rising prosperity. However, the government does have an important role to play infostering a positive business climate and making strategic investments in postsecondary education,public infrastructure and services. Underpinning the government’s ability to promote economicprosperity is a firm commitment to fiscal discipline. The government’s plan to restore fiscal disciplineto Ontario is outlined in Paper A, Investing in People—Managing Ontario's Finances.

This paper outlines the government’s economic strategy to secure the investments in both people andcapital that will foster productivity improvements and achieve the potential of Ontario’s economy tocreate more jobs and higher incomes. These results could be enhanced by the active co-operation ofthe federal government in pursuing policies that recognize that a strong Ontario economy means astrong Canadian economy.

The key elements of the government strategy for making progress towards a new generation ofeconomic growth include:

Ë new $6.2 billion cumulative investment by 2009-10 in Reaching Higher: The McGuintyGovernment Plan for Postsecondary Education, to create quality higher education, improve accessand ensure Ontario’s colleges and universities remain competitive with the best in the world;

Ë investing in roads, bridges, public transit, water and sewage treatment, hospitals, schools, colleges,universities and other capital projects through a five-year public infrastructure plan with a totalvalue of more than $30 billion;

Ë taking steps to ensure a reliable, sustainable electricity supply, including the development of newsources of clean, renewable power and initiatives to encourage conservation;

Ë maintaining a competitive tax and business environment;

Ë modernizing the regulatory environment to strike the right balance between business needs and thepublic interest in the rapidly evolving global market;

Ë targeting investments in key sectors to capitalize on Ontario’s strengths and promote productivityimprovements;


Ë increasing Ontario’s public research and development investments and proposing to establish theResearch Council of Ontario, strengthening regional innovation networks and marketing Ontarioas a leading North American jurisdiction for scientific research and innovation;

Ë achieving the potential of Ontario’s regions and municipalities to contribute to economic growthand prosperity; and

Ë helping new Canadians and internationally trained professionals integrate more rapidly into theOntario economy.

Details of the government’s economic strategy are presented in the following sections:

Ë Section I describes Reaching Higher: The McGuinty Government Plan for PostsecondaryEducation as well as measures to help new Canadians enter the labour force more quickly;

Ë Section II focuses on encouraging business investment, key sector initiatives and modernizingregulation;

Ë Section III describes government strategies to promote growth and innovation through improvedco-ordination of research;

Ë Section IV outlines a fiscally responsible approach to strategic infrastructure investments; and

Ë Section V describes strategic measures that the government is taking to support effectiveparticipation of Ontario’s cities and regions in the next generation of economic growth.

The Appendix provides the macroeconomic projections that underlie the 2005 Budget fiscal plan.


Section I: Knowledge and Skills: Key to EconomicProsperityAn educated and skilled workforce provides the key competitive edge for Ontario in the 21st century. In coming years, the brains and know-how of the workforce will provide ideas and skills to drive aninnovative economy—one that is able to respond to challenges and seize opportunities in a fast-pacedglobal market. Knowledge workers act as a magnet for leading-edge firms seeking to invest in newideas. In addition, workers with up-to-date skills can make the most of emerging technologies andcontribute to a more productive economy that can compete successfully for international investmentcapital.

Industries and occupations are constantly evolving and requiring new skills. What is new today is thelevel and breadth of knowledge and skill necessary to prosper. Ontario’s workers and employers mustbe flexible and responsive to succeed in the global marketplace. With recent education investments byother jurisdictions, an increasingly competitive global economy and the relentless advance of newtechnologies, Ontario must also ensure that its institutions of higher learning that educate the skilledworkers required are competitive with the best in the world.

The emerging challenges of the global marketplace are compounded by the fact that Ontario’s labourforce is aging and forecast to grow more slowly over the next few decades. Although Ontario’spopulation is relatively younger compared to European countries and Japan, it is projected to agefaster than that of the United States, mainly because of a lower fertility rate.

Baby Boom Will Drive Aging of the Population and Slower Labour-Force Growth

Ë The baby-boom cohort, which comprises one-third of Ontario’s population, is starting to approach retirement. Ë Baby boomers will begin to turn 65, starting in 2011. Seniors will make up 22 per cent of the population by 2031,

compared to 13 per cent now.Ë The working-age population will also be older: the share of those aged 50+ is projected to rise from 37 per cent in

2005 to 48 per cent in 2031 while the share of youth will fall from 17 per cent to 13 per cent.Ë The number of people turning age 65 will, for the first time, outpace youth turning age 15 in 2017.

This demographic challenge requires labour-market policies that unlock the full potential of Ontario’sworking-age population so that slower labour-force growth will not be a drag on the economy in yearsto come. This means ensuring that educational institutions equip people with the leading-edgeexpertise and skill sets required to contribute to Ontario’s economy. It means knowledge and skillsmust be kept current through lifelong learning and on-the-job training. It means making full use ofnew Canadians’ skills. It also means encouraging the broadest labour-force participation of theworking-age population, including older workers who want to work for as many years as they arewilling and able, and youth with little education and poor job prospects.


REACHING HIGHER: THE MCGUINTY GOVERNMENT PLAN FORPOSTSECONDARY EDUCATIONIn the 2005 Budget, Ontario is making an essential strategic investment in the knowledge and skills ofOntario’s workforce that will translate into competitive advantage and economic growth.

Strong People, Strong Economy

“Ontario will be the place to be when our citizens are equipped to compete with people all over the world for the best jobsand investment. We will build a prosperous economy that is grounded in the knowledge and know-how of our people. Improving the quality of our workforce spurs economic growth and stimulates investment in innovation and better publichealth care. Strong people build a strong economy.” —Getting Results for Ontario, Premier’s Progress Report, 2004.

Reaching Higher is a comprehensive plan for postsecondary education and training—one thatimproves access, one that values quality teaching, research and student experience, and one thatsupports economic prosperity and a higher standard of living.

Paper A, Investing in People—Managing Ontario’s Finances, describes new cumulative investmentsof $6.2 billion, including an additional $683 million in 2005-06, rising to $1.6 billion by 2009-10. This will represent a 39 per cent increase in funding by 2009-10 compared to the 2004-05 fundingbase. It means that funding available for student assistance will more than double, from $332 millionin 2004-05 to $690 million by 2009-10.

Reaching Higher will result in higher quality education and greater accountability. Students willbenefit from greater job opportunities and higher incomes after graduation and their knowledge andskills will create the economic growth of tomorrow.

The government’s new investments will be tied to performance and results. The Reaching Higher planwill see:

Ë 135,000 students benefiting this year from new low-income tuition grants and other enhancementsto student assistance;

Ë a significant increase in the number of students enrolled in postsecondary education institutions;

Ë 14,000 more graduate students by 2009-10; and

Ë more qualified doctors through a 15 per cent expansion of first-year medical spaces.

The investments will also result in more faculty, assured quality teaching and an improved studentexperience; increased access and success for francophones, aboriginals, and persons with disabilities;and improved public reporting of system-wide results.


Reaching Higher: The McGuinty Government Plan for Postsecondary Education

Total New InvestmentË New cumulative investments of $6.2 billion by 2009-10. Additional new investments of $683 million this year, rising

to $1.6 billion by 2009-10 over the 2004-05 funding base.Ë Represents a 39 per cent increase, including a doubling of funding available for student financial assistance

compared to 2004-05.

AccessË Significantly increase the number of students enrolled in postsecondary institutions.Ë $358 million additional funding for student financial assistance by 2009-10; $192 million of new funding in 2005-06.Ë New low-income tuition grants, in partnership with the federal government and the Canada Millennium Scholarship

Foundation, higher weekly loan limits and reduced parental contributions, benefiting 135,000 low- and medium-income students in 2005-06.

Ë $50 million annually for the Ontario Trust for Student Support to match private-sector contributions to createendowments for student support.

Ë $100 million to create endowments at universities that will provide fellowships for outstanding graduate students.Ë $55 million annually by 2009-10 to improve access and success of under-represented groups.Ë $20 million annually by 2007-08 for northern and rural colleges to increase opportunity and ensure quality.Ë A strategy to attract more international students and encourage study abroad for Ontario students.Ë $220 million new investment annually by 2009-10 to expand graduate education by 14,000 students.Ë $95 million new funding to improve medical education and expand first-year spaces by 15 per cent by 2008-09.Ë Capital support to expand graduate and medical school facilities.Ë $20 million annually by 2007-08 for new apprenticeship initiatives and other investments for new Canadians.

Quality Ë $1.2 billion or a 35 per cent additional investment in operating grants by 2009-10—supporting enrolment growth,

hiring faculty, improving student resources, expanding graduate education and enhancing student experience.Ë A proposed Research Council of Ontario to co-ordinate research priorities.Ë $25 million to endow new faculty chairs for research and to improve graduate education.

AccountabilityË A proposed Higher Education Quality Council of Ontario to take a lead role on system performance and measures.Ë New bilateral performance agreements with all public institutions to improve accountability.


62.768.5

58.366.2

37.954.3

58.062.1

65.869.9

0 10 20 30 40 50 60 70 80 90 100

Non-Immigrants

Participation Rate (%)

Employment Rate (%)

Immigrants

• Arrived during the Census year

• Arrived within last 5 years

• Arrived within 6 to 10 years

Participation & Employment Rates, Participation & Employment Rates, Immigrants & NonImmigrants & Non--Immigrants, Ontario, 2001Immigrants, Ontario, 2001

Source: Statistics Canada, 2001 Census.Rate

INTEGRATION OF NEW CANADIANS INTO THE LABOUR MARKETThe government is also investing in enhanced services to help new Canadians enter the labour marketmore quickly.

Ontario welcomes about 125,000 newCanadians every year, fully half or more ofall new Canadians. While new Canadianstend to arrive with even stronger educationalcredentials than the Ontario population as awhole, many new Canadians encounterbarriers to working to their full potential. According to Statistics Canada, recentlyarrived immigrants have lower employmentrates and lower earnings than those whoarrived in previous decades.

New Canadians already account for asignificant proportion of net labour-forcegrowth. As the population ages and fertility rates continue to be low, this will increase to the pointthat, within the next decade, new Canadians may be the only source of net labour-force growth. Withcurrent and expected shortages in many occupations and skilled trades, Ontario’s economy mustutilize new Canadians’ potential.

The government has made progress in removing barriers to credential recognition, working with 36occupational regulators. Ontario has funded over 35 bridging support and employment projects tointegrate new Canadians more quickly into Ontario’s labour market and has implemented thesuccessful International Medical Graduates Ontario system to train and license foreign-trainedphysicians.

NEW TRAINING INVESTMENTSAdditional investments outlined in this Budget will help expand the apprenticeship system, improvejob prospects for new Canadians, and create new opportunities for at-risk youth. An effectivepartnership with the federal government and signed labour-market and immigration agreements wouldprovide important new resources to deliver on Ontario’s labour-market priorities.


New Training Investments

Ë $10 million in 2006-07, rising to $17.5 million annually by 2007-08, for new services for new Canadians andprospective apprentices, including outreach, assessment, pre-apprenticeship and academic upgrading, as part of thenew One-Stop Training and Employment System.

Ë Labour Market Integration Assistance for New Canadians– $2.5 million annually for expansion of Bridge Training programs that help skilled new Canadians move quickly

into the labour market;– $4 million over the next two years for colleges to pilot re-engineered processes and programs to help new

Canadians access college education and jobs; and– $1 million over two years to pilot programs to encourage employers to better recognize the skills of new

Canadians.

The initiatives in this Budget build on training programs announced in the 2004 Budget with newinvestments that reinforce the government’s priorities.

Current Training Initiatives and Results

Commitments:Ë $11.7 million by 2006-07 to expand

apprenticeship.

Results to Date:Ë Exceeded target of 19,000 new registrants in 2004-05. On

target to increase new registrants by 7,000, reaching 26,000 intotal per year by 2007-08.

Ë $95 million Apprenticeship Training TaxCredit to encourage employers to hire moreapprentices. Up to $15,000 available overthe first three years of an eligibleapprenticeship.

Ë Tax Credit legislated and endorsed by employer groups.

Ë $15 million annual funding by 2007-08 fornew academic upgrading and trainingoptions for early high school leavers.

Ë Already provided academic upgrading opportunities for about800 at-risk youth and adults. Will serve 6,000 at maturity.

Ë $12.5 million by 2005-06 to expand BridgeTraining and other employment services fornew Canadians to enter the workforce.

Ë Over 35 Bridge Training projects. Enhanced language trainingfor 3,000 people. Information and referral for 5,000 clients andmore intensive employment services for 650 through JobConnect.

Ë Eliminate barriers to credential recognitionand job entry for new Canadians.

Ë Released “Opening Doors—An Investment in Prosperity” inJanuary 2005, reporting on progress made in a number ofprofessions and trades.

Ë $4.5 million by 2005-06 forscholarship/employer bonuses for highschool leavers entering apprenticeship.

Ë Program implemented and first 100 scholarship recipientsidentified.


Ë Design and implement new One-StopTraining and Employment System.

Ë Consultation and planning underway.

Ë $111 million annually for Job Connectlabour-market training and support services.

Ë 129,000 people, largely youth, served by Job Connect in 2004-05. 80 per cent found a job or went on to furthereducation and training.

Ë $52 million annually for Ontario SummerJobs Strategy.

Ë More than 61,000 young people found summer jobs or startedtheir own businesses in 2004-05.

Ë JobsNow, an innovative pilot project in sixcommunities to help people leave welfare forwork.

Ë Approximately 1,500 jobs already identified and first jobplacements underway.


0

2

4

6

8

10

1981 1984 1987 1990 1993 1996 1999 2002

Ontario U.S.

OntarioOntario’’s Corporations Are Highly Profitables Corporations Are Highly Profitable

Sources: Data from Statistics Canada PEA, and U.S. BEA.

After-tax Profits as Per Cent of GDP

Capital Investment in Ontario Lags the U.S.Capital Investment in Ontario Lags the U.S.

Sources: Statistics Canada and BEA.

90

100

110

120

130

140

150

160

170

1989 1991 1993 1995 1997 1999 2001 2003

Ontario U.S.

Business sector machinery and equipment capital stock relative to working-age population, 1989 = 100

Section II: Encouraging Business InvestmentThe Ontario Government recognizes that the private sector is the principal source of economic growthand increasing prosperity. Businesses assess a large number of factors in deciding where to invest,including the quality of government services, infrastructure and, above all, the skills of the workforce.

One of the government’s principal goals is to makeOntario more attractive to investors. To achievethis, Ontario has to compete by finding the rightbalance between taxation and government servicesand by delivering excellent value in the servicesprovided.

Studies looking at the total cost of doing business,including all taxes paid by firms, have found thatcosts in Ontario are lower than in the UnitedStates. This has resulted in a favourable level ofprofitability for corporations operating in Ontario. In fact, corporate after-tax profits are a higher share of GDP in Ontario than in the United States. Oneof Ontario’s key benefits is its publicly funded health care system, which provides its exporters with asubstantial cost advantage relative to their U.S. competitors. A 2002 survey for the Ontario Chamberof Commerce suggests that almost two-thirds of respondents consider our health care system to be acompetitive advantage. In contrast, U.S. firms are increasingly concerned about how their health caresystem is affecting U.S. competitiveness.

“The cost of health care in the U.S. is making American businesses extremely uncompetitive vs. our global counterparts.”— G. Richard Wagoner Jr., Chairman and CEO, General Motors Corporation

New capital investment is critical, bringing with itnew technology that allows work to be done moreefficiently, and enabling companies to increase thewages and salaries they pay to their employees. New capital investment also creates more andbetter jobs.

Ontario does, however, face challenges over thenext few years. Existing competitors in Canadaand around the world are actively pursuingopportunities to attract innovative, high-valueinvestments and new competitors are emerging astechnology links more and more countries aroundthe globe. Moreover, Ontario’s cost advantages


have been narrowed by an appreciation of the Canadian dollar of about 25 per cent against the U.S.dollar since January 2003.

By investing in education and training, pursuing opportunities for targeted, strategic investments andsupporting continuous improvement in the business environment by modernizing regulation, thegovernment is acting to meet these challenges.

CORPORATE TAXATIONOntario already has a competitive level of corporate tax rates. The rates remain lower than those in theneighbouring states of the United States. In addition, Ontario is proceeding with phasing out thecapital tax, a tax widely acknowledged as detrimental to the investment climate. Ontario also has avery favourable tax rate for small business corporations, which provides strong encouragement toentrepreneurial individuals to start new businesses.

To further support business investment, this Budget proposes to parallel recently announced federalregulatory changes, to align the capital cost allowance (CCA) rates with the useful life of assets and toencourage investment in assets used to generate efficient and renewable energy, subject to federalimplementation.

SECTOR ADVANTAGES AND STRATEGIESToday, Ontario’s skilled workforce, competitive business costs and superior quality of life aretremendous advantages with the potential to attract more international firms seeking access to U.S.markets.

Ë Ontario’s top 10 manufacturing export industries enjoy a major labour skills advantage,particularly in college credentials, as about 48 per cent of their workforce have completedpostsecondary education (33 per cent college and 14 per cent university). In the United States,only 32 per cent of the workforce in these industries have completed a similar level of education(nine per cent college and 23 per cent university).

Ë This skills advantage is enhanced by a labour cost advantage (including health care costs)—sevenout of the top 10 manufacturing export industries have a labour cost advantage compared to theUnited States, ranging as high as 19 per cent for computer and electronics, 16 per cent for the autosector and 15 per cent for chemicals.

1 Foreign and Domestic Investment in Canada, Catalogue no. 61-232-XIB, February 2005.


Ontario’s Top 10 Manufacturing Export Industries Have a Substantial Skills Advantage (2001)*

Per Cent of Workforce with Completed Postsecondary Education

Ontario’s SkillsAdvantage*

CollegeOntario

CollegeU.S.

University Ontario

University U.S.

Motor Vehicle & Equipment 16 32 8 10 19

Chemical 12 33 7 28 41

Machinery 27 47 12 13 21

Primary Metals 25 38 8 8 14

Computer & Electronic 16 33 11 38 44

Plastic & Rubber 13 26 8 11 16

Food 19 26 5 12 14

Pulp & Paper 16 33 8 9 17

Fabricated Metals 25 39 8 9 13

Furniture 18 26 8 10 10

Total 16 33 9 14 23

* Per cent of Ontario's workforce with completed postsecondary education minus that of the U.S. Ages 25 and older.Numbers do not add due to rounding.Sources: Statistics Canada (Census), Bureau of Labour Statistics (CPS) and Ontario Ministry of Finance comparisons based on OECDstandardized educational attainment categories.

Recently released Statistics Canada data1 show that, over the past five years, Ontario (with 41 per centof Canada’s GDP) attracted 50 per cent of all the machinery and equipment (M&E) investment byforeign investors in Canada. Of all the M&E investment undertaken in Ontario, 39 per cent was byforeign owners. Much of this is in the form of expansion by companies that are already located inOntario, rather than by new enterprises. Both kinds of investment are important.

However, the Province must continue to invest and innovate in order to remain competitive. Postsecondary and training initiatives are such investments. Strategic public investments can alsoenhance the competitive advantages of key sectors.

The Ontario Automotive Investment Strategy is bolstering the economy’s strong and productiveautomotive industry through investment in innovation and skills. This will consolidate the foundationfor Ontario’s leading position in this important industry, with the best-educated, most highly skilled,productive workforce in North America. Supporting the industry’s progress in developing innovative


processes and technology, the government has committed up to $235 million for GM Canada and$100 million for Ford Canada, leveraging investments totalling $2.5 billion by General Motors andover $1 billion by Ford.

Ontario agriculture enjoys a favourable climate and soils, and proximity to major markets, but hasbeen challenged recently with low grain and oilseed prices and with the interruption of cattle and beeftrade.

To help keep the agri-food sector positioned for success, the government has provided over$170 million in support for grain and oilseed farmers, as well as up to $30 million announced last fallto help the cattle industry recover from export restrictions. To enhance consumer confidence inOntario’s meat products, the government is tightening meat safety standards and has provided$25 million to help meat processors meet the new requirements.

Creative industries and people are an emerging engine of economic growth, contributing to dynamicand cohesive communities.

The Entertainment and Creative Cluster comprises the arts, cultural media industries (e.g., publishing,sound recording, film and television production, interactive digital, video game developers), relatedhigh-tech companies (e.g., software and post-production houses) as well as independent artists,authors, musicians and filmmakers. There are also extensive linkages with fashion, architecture,graphic and industrial design sectors.

By building on the creativity and diverse skills already found here, the creative industries in Ontariocan be leaders in the global marketplace. By targeting the convergence of creativity and technologyand broadening the audience for cultural output developed in Ontario, creativity-based enterprises arecatalysts for economic growth.

Actions to Support an Entertainment and Creative Cluster

Ë In addition to enhanced tax incentives for film and television production announced in December 2004, this Budgetproposes enhancements to the tax incentives for sound recording, book publishing, interactive digital media andcomputer animation to promote a competitive and stable environment in which to produce innovative culturalproducts.

Ë Strategic investments of $10 million in the Canadian Film Centre and $5 million for the Royal Conservatory of Music’s Learning Through The Arts program will support training opportunities to nurture creative talent as the foundation ofthe next generation of culture and media.

Ë Provincial commitments to highlight Ontario’s cultural renaissance and spirit of diversity will increase cultural tourism. The Lord of the Rings stage show will make its world première early next year in Toronto. Assisted by a $3 millionProvincial loan, the show will reinforce the province’s international reputation as an entertainment leader. To build onthe Toronto International Film Festival’s success, the Province has committed $25 million towards a permanenthome for the Festival, which has been matched by federal funding.


One of the ways that the creative arts supports economic growth is by attracting tourists to Ontario. The unveiling of new facilities and visions by several major cultural institutions in 2006, such as theRoyal Ontario Museum, Canadian Opera Company and Gardiner Museum of Ceramic Arts, willencourage more visitors to experience all that Ontario has to offer.

In line with these moves, Ontario’s position as an attractive destination for tourists is bolstered by anew casino in Niagara, which opened in 2004. In addition, $400 million has been committed forimprovements to Casino Windsor to encourage economic growth and revitalization opportunities.

The mining industry is benefiting from strong global demand. New opportunities for diamond miningare creating a new industry in the north. Ontario offers potential for other new mineral discoveries aswell and continues to spur grassroots mineral exploration with a flow-through share tax credit, incontrast to the elimination of this credit by the federal government in December 2005. As well, theBudget is announcing a $15 million initiative to expand geological surveying in the north.

MODERNIZING REGULATIONIn today’s global economy, governments’ regulatory reach is pervasive and often overlapping,affecting diverse areas such as justice and property rights, competition, health and safety, labourrelations, environment, land use and financial markets. Achieving the correct balance in regulation iscritical to unlocking the potential of businesses to adapt to changing markets and seize profitableopportunities to create income while protecting the public interest.

There is considerable international evidence that businesses view the regulatory environment as animportant factor when making global investment decisions. Several organizations undertake annualcomparisons of interjurisdictional competitiveness, some more specialized in scope than others, but allpay attention to regulatory features.

The OECD studies the regulatory environment in industrialized countries. It has noted the importanceof flexible, performance-oriented regulatory standards, which allow business to choose the mostefficient means of achieving outcomes. This includes a greater role for self-regulatory processes, suchas industry-led standards development and formal self-regulatory organizations (SROs).

One of the critical issues for companies and foreign investors is the efficiency, effectiveness andfairness of business and financial services regulation. To secure Ontario’s position as an attractive andsecure place to invest, regulators need to continue to move forward to modernize regulation and keepup with a changing global marketplace.

Ë Ontario’s recently announced Small Business Agency will help small business grow and succeedby promoting regulatory best practices, streamlining paperwork and ensuring that small businessinterests are considered as part of the government’s decision-making process.


Ë Ontario will work closely with the federal government on its Smart Regulation initiative. Thiseffort is intended to lead to better regulations that safeguard the interests of Canadians whilesecuring the right conditions for economic growth.

Ë Ontario is pursuing initiatives to modernize business law in areas such as commercial andsecurities law, mortgage brokering and credit union regulation.

Modernizing Financial Regulation to Support a New Generation of Economic Growth

Ë Modern business laws must reflect current market realities and embody high standards of investor protection andcorporate governance. An updated commercial law framework would support a competitive business environmentthat attracts investment and ensures prosperity for the people of Ontario.

Ë The Minister of Consumer and Business Services will be leading the implementation of a multi-year plan to updateOntario’s commercial law framework. Later this year, updated securities transfer legislation will be introduced toaddress the legal uncertainty that now exists and enhance the competitive position of Canada’s capital markets andsecurities firms. Changes will be proposed to conform Ontario’s corporate and securities laws and to reconcileinconsistencies and eliminate duplication. Longer term, comprehensive legislation to modernize Ontario’s corporatelaws to improve governance and accountability will be developed.

Ë The government has already responded to several of the recommendations of the Standing Committee on Financeand Economic Affairs (SCFEA) Report on the Five Year Review of the Securities Act. Responding to a keyrecommendation, legislation was passed in 2004 to allow the government to implement broader rights for investors tosue public companies for disclosing false or misleading information. The government remains committed to quicklycompleting the final steps needed to implement this change, including the associated regulation changes.

Ë The Chair of Management Board is leading work to ensure that, later this year, the next round of legislative changesto respond to the SCFEA Report, including some that would support moving to a common securities regulator, will beintroduced. Longer term, updated legislation that could serve as the basis for the common set of securities’ laws tounderpin a common securities regulator will be introduced.

Ë A common securities regulator is key to making Canada’s capital markets more competitive and more efficient. Itwould reduce the regulatory burden on companies and lead to better and more consistent enforcement, whichmeans greater protection for investors. That would help attract investment to all provinces and territories and helpensure that businesses can access the capital they need to grow and expand.

Ë The government reaffirms its 2004 Budget commitment to introduce a bill to replace the Mortgage Brokers Act in2005. Following consultations on a discussion paper, in March 2005, the government released for public comment aconsultation draft of the Mortgage Brokerages, Mortgage Lenders and Mortgage Administrators Act along with draftlicensing regulations. The proposed legislation would improve consumer protection, streamline regulatoryrequirements, ensure cost-effective regulation, and harmonize with other regulatory bodies and jurisdictions whereappropriate.

Ë The review of the Credit Unions and Caisses Populaires Act is well underway. The government has been workingwith the sector to identify proposed changes to the legislation that would modernize the rules and enable creditunions and caisses populaires to better serve their customers and compete in the financial services marketplace.The government reaffirms its intention to introduce amendments to the Act by the fiscal year ending 2006.

Ë The government is also proposing to update pensions legislation to facilitate the effectiveadministration of multijurisdictional and jointly sponsored pension plans.


Modernizing Pension Regulation

Employment Pension Plans Ë Ontario intends to introduce amendments to implement an accord being discussed between Ontario and Quebec on

common pension standards for employment pension plans with members in both provinces. With the assistance ofthe Canadian Association of Pension Supervisory Authorities (CAPSA), the proposed Ontario-Quebec pensionaccord is expected to serve as a template for an expanded Canadian agreement, thus simplifying pension regulationfor employers with employees working in more than one jurisdiction.

Jointly Sponsored Pension PlansË The Pension Benefits Act (PBA) was written with traditional sole sponsorship, defined benefit pension plans in mind

where the employer is solely responsible for making special payments in respect of a going-concern unfundedliability or solvency deficiency. The PBA assumes that plan members are not responsible for making such payments.

Ë With the establishment of Jointly Sponsored Defined Benefit Pension Plans (JSPs), conflicts may exist betweensome of the provisions of these plans and the PBA requirements. In order to address these conflicts, the Provincewill issue a discussion paper that will identify areas of conflict and propose solutions. Legislation to amend the PBAto address these issues will be introduced in the fall and, if approved by the legislature, it is expected that thechanges will be in effect before year-end. Amendments to the PBA Regulation would also be required.

Ë The Teachers’ Pension Act (TPA) already includes provisions that address some but not all of the identified conflicts. It is proposed that these provisions in the TPA be amended or repealed at the same time as the PBA amendmentscome into force, as the amendments to the PBA would provide consistent rules for all JSPs.

In February 2005, the Chair of Management Board announced the establishment of a panel ofknowledgeable and well-respected individuals from across the country to advance the design of acommon securities regulator and demonstrate how it can serve the needs of all provinces andterritories. The panel is chaired by Purdy Crawford, an eminent lawyer and corporate leader.

Canada is the only developed nation without some form of national securities regulator. Othercountries recognize that deep pools of capital, with broad and active participation of investors andlisted companies, are necessary for competitive and effective equity markets.

Canada’s equity market is only six per cent of the size of the equity market in the United States, ourmost critical competitor. Only a small proportion of Canadian public companies have access to thislarger U.S. pool. Within Canada’s relatively small market, only 16 per cent of public companiesbenefit from access to investors in all provinces.

Fragmented securities regulation means it is unusually difficult and costly for the remaining84 per cent, mainly small and medium-sized public companies, to raise money. They have access to alimited number of potential investors. These companies have a substantial inherent disadvantage inraising capital relative to their U.S. competitors.


1 Province16%

2-3 Provinces

84%

0102030405060708090

100Per Cent of Public Companies*

* Reporting IssuersSources: Ontario Ministry of Finance based on OSC data.

Few Few CanadianCanadian Public Public CompaniesCompanies* Have * Have Access to Access to the the Full Full Canadian MarketCanadian Market

4-9 Provinces

Full Market: Access to All Provinces Fragmented Market

Canada needs a common securities regulator to realize the economic growth opportunities that arecreated by a competitive and effective equity market. A common securities regulator, a common bodyof securities law and a single fee structure with fees set on a cost-recovery basis would providecompanies and investors with:

Ë a common interpretation and consistent application of regulatory requirements, which makescompliance more straightforward;

Ë more effective enforcement of securitieslaws and therefore greater protection forinvestors;

Ë the largest possible capital pool forsmall and medium-sized public andprivate companies, wherever they maybe located across Canada;

Ë fewer lost financing and investmentopportunities that arise now from delaysand complexities of dealing with anumber of different laws and regulators;

Ë one set of clear, consistent protectionsthat is easy for investors to understand;and

Ë cost-effective regulation.


Section III: Research and Innovation for EconomicGrowthResearch and innovation are important drivers of economic growth. Through their investments inresearch and development (R&D), business, governments and research institutions all play key roles inincreasing Ontario’s innovation capacity.

Public institutions, such as universities, colleges and hospitals, account for about one-quarter of thetotal R&D performed annually in Ontario, while business accounts for almost all of the rest.Governments provide a competitive R&D tax regime and other incentives to business plus directfunding to institutions undertaking R&D activities.

The 2004 Premier’s Progress Report noted a Provincial commitment of $1.8 billion over four years tosupport both research and commercialization through Ontario’s public and not-for-profit R&Dinstitutions. Continued R&D investment is critical to increasing Ontario’s innovation capacity, butmore can be done. Ontario must encourage partnerships and co-ordination among business,governments and institutions to lever the benefits of R&D investment and bring discoveries to market. This is essential if Ontario is to compete with other jurisdictions, especially in the United States, whichcan spend more on R&D as a share of economic output partly due to the larger U.S. federalcommitment to research (including military).

GREATER RESEARCH AND COMMERCIALIZATION INVESTMENTThe new Ontario Research Fund (ORF) will consolidate several Ontario research programs that havebeen funded separately in the past, totalling $730 million to 2007-08, for new and ongoing researchcommitments. This includes the new $300 million investment in research infrastructure announced bythe Premier last fall.

A consolidated Ontario Research Fund will provide operating, capital and overhead funding to supportleading-edge R&D in Ontario’s research institutions. Priority will be given to research in keyeconomic sectors, including automotive, agriculture, advanced manufacturing technologies,biotechnology, information and communications, alternate energy/fuel cells, environmentaltechnologies and nanotechnology. The Fund will also support efforts to connect youth to researchers,and attract, develop and retain world-class research talent.

Also, the government is moving towards a more co-ordinated, stable cancer research system in theprovince by consolidating the new Cancer Research Program with the existing Ontario CancerResearch Network.


The Cancer Research Program will build on Ontario’s existing strength in cancer research bydeveloping a “critical mass” of cancer researchers. Working in partnership with the cancer researchcommunity in Ontario, this program will help make Ontario a recognized, leading jurisdiction incancer research that will retain and attract the best researchers and clinicians to the province. Theprogram will focus on supporting leading-edge cancer research across disciplines; multidisciplinarypopulation studies of causes; prevention and early detection of cancers; translating research intoprograms, technologies and therapies; and working with industry to commercialize research results.Through 2007-08, the Province of Ontario will commit $142 million for cancer research.

The Minister of Economic Development and Trade will announce the details of the ORF, including acall for proposals, and the Cancer Research Program in the near future.

As the next step, the Ontario Government proposes to establish a Research Council of Ontario. TheResearch Council of Ontario is a strategic economic initiative of the government to help make Ontarioa North American leader in research and to promote the province’s innovation opportunities to theworld.

Through greater co-ordination and alignment of public research and commercialization investments,and better dialogue with industry to identify research areas and opportunities of mutual interest,Ontario’s economy can realize a greater productivity boost than it otherwise would. Details of thenew Council will be announced in the fall of 2005.

Complementing the proposed ResearchCouncil of Ontario is a newcommercialization framework based on asystem of “regional innovation networks.” These are multi-stakeholder, regionaldevelopment organizations established withProvincial funding that support partnershipsamong business, institutions and localgovernments to promote innovation. Whileinitially focused on the life sciences,Ontario’s 11 active regional networks areexpanding into other areas of innovationexcellence such as information technology,energy conservation, and advancedmaterials—depending on their local strengths and opportunities.

One of the benefits of these networks is that they can bring commercialization services closer to theclients that need them—small firms, researchers, entrepreneurs and investors. The regional networkscan also facilitate access to other commercialization resources, including the Ontario Centres ofExcellence, the new Medical and Related Sciences (MaRS) centre, the Ottawa Centre for Research andInnovation, and Communitech.

Northern Ontario Biotechnology Initiative

Ottawa Life Sciences Council (Ottawa and Eastern Ontario)

Eastern Lake Ontario Regional Innovation Network

Greater Peterborough Area DNA Cluster

York Biotech

BioDiscovery Toronto

London Cluster Consortium

Western GTA Consortium

Golden HorseshoeBiosciences Network

Guelph-Waterloo Partnership in Biotechnology

Southwestern Ontario Biotechnology Innovation Network

1

2

3

4

5

6

7

9

8

10

1112

3

45

6

7 89

10

11

Ontario’s Ontario’s Commercialization Framework:Commercialization Framework:A System of Regional Innovation NetworksA System of Regional Innovation Networks


Local Science for Global Impact

The following are some examples of how the Ontario Government will strengthen regional capacity for innovation:

Ë $10 million will help support the establishment of the McMaster Innovation Park, to be built on a former industrial“brownfield” site in Hamilton. The new park will become a focal point for industry, governments and institutionsworking together to support research excellence and innovation in advanced materials and manufacturing, nano-technology and bioscience.

Ë The Ontario Government has provided support for the expansion of the Sudbury Neutrino Observatory Institute, aworld-renowned, state-of-the-art research centre. Retail sales tax relief was provided on the Institute’s purchase ofresearch equipment for its International Facility for Underground Science project.

Ë Over three years, the provincial government is investing $6.5 million in the Medical and Related Sciences (MaRS)centre to help market Ontario’s technology opportunities to the world.

Ë A $3 million endowment to establish a research chair at the University of Guelph, which is one of Canada’s leadinguniversities in bio-agricultural research. The government will also provide $3 million to the University of Toronto toestablish a research chair in productivity and competitiveness.

INCREASING COMMERCIALIZATION OF RESEARCHBy strengthening linkages between business and institutions at the regional level, Ontario’s newcommercialization framework will also play a pivotal role in creating business opportunities for theprovince’s venture capital market.

Venture capital is an essential ingredient for commercializing new technologies. While the venturecapital market in Ontario has matured substantially over the past two decades, it is often a challenge toraise capital in the earlier stages of high-risk technology businesses, especially those coming fromresearch in universities and hospitals.

The recently established Ontario Commercialization Investment Funds program will encourageresearch institutions to partner with accredited investors in commercializing research developed byfaculty, staff and students. As well, the Ontario Research Commercialization Program will helpresearchers and institutions develop their inventions to an “investor-ready” state.

While these programs are being implemented, the Ontario Government will continue examining other focused approaches to overcoming bottlenecks in the commercialization of research and the creationof new businesses. In addition, the government is studying the broader venture capital market, and therole of Labour Sponsored Investment Funds (LSIFs) within the industry. The review of the LSIFprogram, which the government announced in the 2004 Budget along with a moratorium on newregistrations, has been proceeding over the past year. It is expected that the results of this review willbe released later this spring.


Overall, the benefits from Ontario’s new commercialization framework will depend on a strongsupportive climate for business innovation. Through modern smart regulation and various taximprovements, the government has taken steps to help financial markets work better.

Regulatory and Tax Environment Supports Innovation

The regulatory and tax environment in Ontario has improved dramatically over the past two decades, making privateequity markets much more attractive to risk-taking in venture investments:

Ë the Ontario Securities Commission (OSC) has modernized its regulations to facilitate access to capital for smallbusinesses from accredited investors and capital pools;

Ë federal and provincial investment regulations affecting institutional investors, such as pension funds and insurancecompanies, have been modernized since the mid-1980s to allow a more flexible “prudent portfolio” approach toinvestments;

Ë the combined federal and provincial capital gains tax has been cut almost in half, and the capital gains rolloverprovisions for angel investors have been substantially improved; and

Ë the federal tax regime governing foreign investment has been liberalized since 2000.


Section IV: Strengthening Infrastructure, the Foundation of Ontario’s EconomyFor Ontario’s economy to reach its full potential, it must be supported by an effective system ofphysical infrastructure—one that provides efficient transportation for goods and people, clean drinkingwater and adequate, reliable power supplies. In order to effectively support higher living standards,infrastructure investments must strike a balance between the needs of Ontario’s open, export-orientedeconomy and considerations such as public health and the environment.

The government has important roles as both a provider and co-ordinator of physical infrastructure. However, as noted in Paper A, Investing in People—Managing Ontario’s Finances, Ontario faces achallenging fiscal environment that must be addressed in a responsible, balanced manner.

The Province’s five-year infrastructure plan includes major new investments in health, education andthe economy. The total value of these investments is more than $30 billion.

Ontario’s Five-Year Infrastructure Plan Highlights

Ë Funding new, upgraded and expanded hospitals to reduce wait times, provide better services in high growth areas,and modernize older hospitals.

Ë A substantial expansion of graduate school spaces to accommodate the double cohort as it progresses through thesystem, as well as new medical school spaces to expand the supply of doctors.

Ë A multi-year investment in elementary and secondary school renewal that is expected to generate $4 billion ininvestments in the next few years.

Ë An enhanced Canada-Ontario Affordable Housing Program that will help create over 15,000 new units of affordablehousing, including housing in remote communities and supportive housing for victims of domestic violence and forpersons suffering from mental illness.

Ë Substantial improvements in border infrastructure to foster increased trade with the United States and make travelacross the border quicker and easier.

Ë Continued high levels of transit investment in partnership with other levels of government: $1 billion over 10 years forGO Transit expansion and renewal, $1 billion over five years for the Toronto Transit Commission, and $600 millionfor the Ottawa O-Train.

Ë The first round of projects under the new Canada-Ontario Municipal Rural Infrastructure Fund (COMRIF), which willstimulate up to $900 million through federal, Ontario and municipal contributions. Many local water, wastewater, roadand bridge projects will be funded in rural communities and small urban centres.

Ë Meeting the government’s 2004 commitment to invest $300 million over four years in research infrastructure, so thatOntario’s universities, hospitals and research institutes can continue to attract the best and the brightest, and helpthe economy grow.

Ë Acceleration of the four-laning of both Highway 11 and Highway 69 in northern Ontario.Ë Highway expansion projects to support economic growth, relieve congestion and address significant safety issues in

southern Ontario.


In addition, another round of financing is planned by the Ontario Strategic Infrastructure FinancingAuthority (OSIFA), an innovative loan program that is helping communities renew infrastructure oflocal importance, such as clean water, public transit, and roads and bridges.

Despite this significant investment, the need for capital in areas such as health, the environment andtransportation remains substantial. The government will also consider the potential for strategic assetmanagement initiatives. The Province will be guided by protecting and promoting the public interest,value for money and meeting government priorities. Net proceeds from asset sales will not be used forongoing operating expenses and, as a first priority, will be invested in infrastructure improvements.

ELECTRICITYA reliable, sustainable and diverse electricity sector is vital to building a strong and prosperousOntario. Last year, the government passed the Electricity Restructuring Act, 2004 to reorganizeOntario’s electricity system to more effectively address the critical need for new supply, boostconservation and increase price stability for consumers across Ontario. The Act created the OntarioPower Authority (OPA) with a mandate to ensure an adequate, long-term supply of electricity and aConservation Bureau led by the province’s first Chief Energy Conservation Officer.

By 2020, Ontario will need to refurbish, rebuild, replace or conserve approximately 25,000 megawattsof generation to meet the province’s growing demand. The government has taken steps to create new,clean, reliable and affordable sources of electricity supply, including working with its neighbours tothe east and west to explore developing further hydroelectric projects to address the province’slong-term supply needs.

To ensure power is delivered where it is needed, Hydro One, the company that owns the bulk ofOntario’s transmission system, is currently investing in upgrades to meet growing demand and connectnew generation projects to the grid.


Ë New supply projects will develop a diverse array of power sources and have the potential to add over 5,000 megawatts of new supply projects in Ontario.– On April 13, 2005, four new electricity projects, including a cogeneration project, two new gas-fired generation

plants and one demand response project, were approved with a total capacity of 1,675 megawatts. – In November 2004, the government approved projects that will provide Ontarians with 395 megawatts of clean,

renewable energy from such sources as wind, waterpower, landfill gas and biogas. – Construction of the Niagara Tunnel, which will carry water from the Niagara River to OPG’s Sir Adam Beck

generating complex, is expected to begin in the summer of 2005.– In July 2004, OPG was given approval to return an additional 515-megawatt unit at Pickering to service. In

March 2005, a tentative agreement was reached with Bruce Power to restart two 750-megawatt units at theBruce "A" nuclear facility in Kincardine. The government is in the process of completing its due diligence onthis proposal.

– In April 2005, the government requested additional proposals for the generation of up to 1,000 megawatts fromrenewable sources.

– The government is working on partnering with neighbouring jurisdictions on major hydroelectric projects. InSeptember 2004, the government announced a detailed technical study on the Clean Energy Transfer Initiative(CETI) and proposed hydroelectric projects in northern Manitoba and a transmission line that would bringpower from Manitoba to Ontario. In March 2005, the government submitted a joint proposal with Hydro-Quebec and SNC-Lavalin to support Newfoundland and Labrador in the development of two majorhydroelectric generation projects on the Lower Churchill River in Labrador.

As well as providing for an increase in energy supply, the government has made conservation a toppriority, setting a conservation target of five per cent for Ontario by 2007 and committing to reduce itsown electricity use by at least 10 per cent by 2007. To achieve this goal, the Conservation Bureau willco-ordinate and foster conservation initiatives, including demand-side management programs.

To support conservation, smart meters will be installed in every home by 2010, giving electricityconsumers the ability to reduce and shift their demand in response to electricity prices.

INVESTING IN ROADS AND MUNICIPAL INFRASTRUCTUREKey Highway Investment ExamplesRoughly 70 per cent of freight shipped in Ontario—trucks travelling six million kilometres each andevery day—use roadways within the Greater Golden Horseshoe. Increasing traffic volumesthroughout the region are slowing down goods movement, resulting in lost productivity. As a result,investments to ensure the highway network is in a good state of repair and has adequate capacity arecritical. This Budget includes a significant increase in highway rehabilitation investments over thenext five years to improve highway conditions.

Projects in southern Ontario will focus on improvements to Highway 401 and the QEW throughout theGreater Golden Horseshoe and on other trade corridors, such as Highway 417 in Ottawa. Thegovernment has also begun to plan options for new corridors throughout the province, including aNiagara-GTA corridor, Highway 407 East Completion and extensions to Highways 404 and 427.Easing border congestion is also a key element in promoting strong economic growth across the


$ Cdn per capita, 2004

Note: Imports from the U.S. to Canadian provinces are measured at the province in which Canada Customs cleared the shipment, which may not be the province of final destination for the shipment. Per-capita value for Mexico based on 2003 population data.Sources: U.S. Bureau of Transportation Statistics, Statistics Canada, The World Bank Group; calculations by Ontario Ministry of Finance.

TradeTrade--byby--Truck Truck Across the Across the U.S. Border U.S. Border with with Selected Selected Provinces Provinces and and MexicoMexico

20,004

10,578

6,1564,507

2,345

0

5,000

10,000

15,000

20,000

25,000

Ontario Manitoba Quebec BritishColumbia

Mexico

province. The Ontario Chamber of Commerce estimates that border congestion costs the Ontarioeconomy over $5 billion annually.

Border traffic has grown considerably in the last decade due to the shift to just-in-time inventorysystems and to the signing of free trade agreements with the United States and Mexico.

On a per-capita basis, the value of trade bytruck between Ontario and the UnitedStates is notably greater than that ofMexico or any other province with theUnited States.

On April 21, 2005, the Province and thefederal government committed a total of$129 million to move forward with anumber of initiatives in response to therecommendations contained in the recentSchwartz Report on the Windsor Gateway. On April 20, 2005, the Province alsoannounced that it will fund the municipalenvironmental assessment for the proposedHuron Church truck bypass, a keyrecommendation of the Schwartz Report. If the environmental assessment study is approved, theProvince will also provide up to $150 million for the construction of the truck bypass.

These projects will complement efforts already underway by the Canadian and U.S. governments toreduce crossing times across the Windsor-Detroit border by 25 per cent over the next year, byproviding additional resources for processing commercial traffic.

Supporting Investments in Municipal InfrastructureKey investments in municipal infrastructure are needed to support economic development and addresshealth and safety concerns. For example, transit investments are necessary to improve mobility inurban centres and relieve pressure on strategic corridors for the movement of goods. Improved transitservices attract new riders, reduce the amount of time people must spend commuting and help reduceemissions that are harmful to the environment.

A number of initiatives are underway to help municipalities finance these projects. Investments underthe Canada-Ontario Municipal Rural Infrastructure Fund (COMRIF) as well as the Ontario StrategicInfrastructure Financing Authority (OSIFA) loan program are helping communities renew andimprove infrastructure such as local roads and bridges, and water and wastewater facilities.

OSIFA is an innovative financing vehicle that provides Ontario’s municipalities and other broaderpublic-sector partners with access to low-cost and longer-term loans to renew and build critical publicinfrastructure. OSIFA funds its low-cost and longer-term loans through the sale of InfrastructureRenewal Bonds.


OSIFA currently provides infrastructure renewal loans to Ontario’s municipalities. To date, OSIFAhas committed to provide 166 municipalities with $2.1 billion in low-cost and longer-term loans formore than 1,000 local infrastructure projects in eight critical areas:

Ë clean water infrastructure;Ë sewage infrastructure;Ë municipal roads;Ë municipal bridges;Ë waste management infrastructure;Ë public transit; Ë municipal long-term care homes; andË renewal of municipal social housing.

OSIFA’s infrastructure renewal loans aremaking a real difference in communitiesacross Ontario, from Red Lake innorthwestern Ontario, to St. Thomas insouthern Ontario, to Kingston in easternOntario. The majority of municipalities (146out of 166 municipalities) borrowing from OSIFA are smaller communities with populations under100,000. Smaller communities, especially smaller rural and northern communities, achieve significantsavings by borrowing through OSIFA. Collectively, the municipalities participating in OSIFA’s loanprogram are saving millions of dollars in interest charges and transaction fees over the life of theirloans—savings that benefit local taxpayers.

New Directions for OSIFA

Beginning in 2005-06, the OSIFA loan program is being broadened so that Ontario’s municipalities will be able to useOSIFA’s low-cost and longer-term infrastructure renewal loans to support investments in local culture, tourism andrecreation infrastructure projects that promote economic development and improve quality of life for residents. OSIFA’sinfrastructure renewal loans provide municipalities with the financial flexibility they need to build vibrant and prosperouscommunities.

Later this year, universities will be able to apply for the same low-cost and longer-term loans that municipalities have beenusing to make critical investments in their communities. OSIFA’s infrastructure renewal loans will provide universities thefinancial flexibility needed to remain world-class educators and innovators by investing in facilities that support studenteducation and academic research.

Energy conservation projects will be a key OSIFA priority for both the municipal and university sectors.

Ontarians will be able to invest in infrastructure projects in their communities by purchasing retail Infrastructure RenewalBonds (IRBs). Retail IRBs will provide Ontarians with a solid investment for their future and the future of theircommunities. OSIFA will use the proceeds raised from the sale of IRBs to provide low-cost and longer-term infrastructurerenewal loans to Ontario’s municipalities and universities.

OSIFA Loan Portfolio DistributionOSIFA Loan Portfolio Distribution

Sewage$645 M

30%

Water$594 M

28%

Roads$430 M

20%

Bridges$84 M

4%

Transit$161 M

7%

Long-TermCare Homes

$176 M8%

WasteMgmt.$67 M

3%

2 The Greater Golden Horseshoe includes Brant; Dufferin; Durham; Haldimand; Halton; City of Hamilton;Kawartha Lakes; Niagara; Northumberland; Peel; Peterborough; Simcoe; City of Toronto; Waterloo; Wellington;and York.

3 Estimates from Centre for Spatial Economics and Statistics Canada.


Section V: Unlocking the Potential of Ontario’s Cities andRegionsAll cities and regions contribute to Ontario’s wealth generation potential and quality of life. Between1994 and 2004, all regions in Ontario experienced positive growth rates for both employment andGDP, but economic growth is not automatic, and different cities and regions are on different paths.

Helping all areas of Ontario to contribute and share in growing prosperity is a key Provincial priority. With investments in skills and infrastructure, the government can help cities and regions to develop acompetitive social and business environment that attracts investment and jobs. The federal andmunicipal levels of government must also make investments and implement programs to complementOntario’s efforts.

URBAN GROWTH AND THE GREATER GOLDEN HORSESHOEThe population of the Greater Golden Horseshoe2 is expected to grow from 8.2 million in 2004 to11.5 million by 2031. In 2004, this region is estimated to have contributed approximately 70 per centof Ontario’s GDP and 29 per cent of Canada’s GDP,3 and represents the heart of Ontario’s export-oriented economy. The region’s proximity to U.S. markets is a major advantage.

The Greater Golden Horseshoe provides employers with access to a highly skilled and richlydiversified labour force. The area is also Canada’s most popular destination for new Canadians. Whilethe influx of people into the Greater Golden Horseshoe has strengthened its economic potential byexpanding the labour force and increasing demand for goods and services, the rapid growth inpopulation has also placed pressure on infrastructure and on health, education and municipal services.

The government has responded by setting the stage for a more co-ordinated approach, throughsupporting infrastructure investments and enhanced redevelopment tools. This includes the followinginitiatives:

Ë developing a comprehensive growth plan that will help guide development and infrastructureinvestment decisions in the Greater Golden Horseshoe over the next three decades;

Ë partnering with the City of Toronto and the federal government in a $1 billion, five-year TorontoTransit Commission (TTC) transit investment plan;

4 A 2002 study by the Globalization and World Cities Research Group and Network, which ranked major citiesagainst the benchmark of London.


Ë funding transit throughout the Greater Golden Horseshoe through the sharing of gas tax revenuesand $514 million in transit grants and subsidies;

Ë strengthening transit links in the region through the proposed establishment of a Greater TorontoTransportation Authority (GTTA);

Ë working with the federal government to secure a comprehensive immigration agreement;

Ë building on existing tools for brownfield redevelopment to discourage sprawl and encourage infilldevelopment; and

Ë examining options for the development of potential legislation to implement Tax IncrementFinancing (TIF), a financial tool to promote urban regeneration.

A discussion of the Greater Golden Horseshoe would be incomplete without recognizing the uniquerole of the City of Toronto. The City’s share of the Greater Golden Horseshoe population and itssignificant contribution to Ontario and Canadian GDP highlight the importance of Toronto toOntario’s economic prosperity.

In addition to its size and strategic location, Toronto has been identified as the most advanced ofCanada’s international cities. As Canada’s leading city, Toronto is in competition with other nations’ leading cities such as London, Frankfurt, New York, Los Angeles and Hong Kong.4

The Ontario Government is engaged in consultations with the City of Toronto regarding governanceand fiscal tools.

5 Conference Board of Canada, for the Toronto Census Metropolitan Area.


Strengthening Ontario Through an Empowered Toronto

Toronto contributes roughly 46 per cent of Ontario’s GDP, and 19 per cent of Canada’s GDP.5 The strength of Toronto isdemonstrated by the diversity in the range of local economic activities, including research and financial services, as wellas cultural and entertainment sectors. The City manages Canada’s largest transit system and provides a broad range ofservices to one of the most diverse populations on earth.

Ontario recognizes the City of Toronto as a mature level of government that must become self-reliant and financiallysustainable in order to prosper in the global economy. As a result, the Province is working closely with Toronto officials tocomplete the City of Toronto Act review, which will result in proposed legislation to modernize the City’s governance andfiscal framework. In return for the proposed expanded powers, the Province would ensure that Toronto meets the rigorousaccountability requirements that taxpayers demand.

Canada, Ontario and City of Toronto officials are working to establish a tri-lateral framework agreement. This agreementwill outline how the three levels of government will collaborate on urban development issues. The City has identified theRegent Park Revitalization project as its first priority under the proposed agreement. This will lead to the renewal of a50-year-old public housing project to physically reconnect and reintegrate this community with the surroundingneighbourhoods. Bringing new vitality and business to the east downtown area, the new Regent Park will become amodel of economic, social, environmental and cultural sustainability.

Throughout 2005-06, the Province will also continue to work with Toronto on shared challenges such as transit investmentand the renewal of public infrastructure to ensure that the City retains its prominence as an attractive place to live, workand invest.

Alongside the economic power provided by the Greater Golden Horseshoe and Toronto, it is alsoimportant to recognize the economic growth and diversity that all Ontario cities contribute to theOntario and Canadian economies.

Strong Cities and Urban NetworksWith a critical mass of people, infrastructure and industrial diversification, cities are valuable hubs forinnovation and key assets for their regional economic networks. Cities are able to sustain deep poolsof entrepreneurs, investors, researchers and firms providing critical business services. These pools areessential for turning raw ideas into new products and services to be commercialized and sold in theglobal marketplace.


Having said this, Ontario’s cities are not allthe same. They vary considerably in theirindustrial makeup, size, infrastructure andmarket relationships—including theirlinkages to surrounding rural areas.

Ontario’s cities and municipalities playimportant roles as locations for business. Appropriate Provincial support is necessaryto ensure that they can continue to provideworld-class settings for employment,investment and quality of life.

STRONG, SUSTAINABLEMUNICIPALITIESMany of the services that help make Ontario businesses competitive—such as water, waste collection,transit and roads—are delivered at the local level. The Province recognizes the important role that allmunicipalities play in delivering these services, and believes that ensuring well-funded, efficientmunicipal services contributes to the economy by creating greater certainty for investors andmaintaining a high quality of life for residents.

In an effort to create greater transparency within the municipal sector, the government has re-examined the municipal-provincial fiscal relationship and has introduced the Ontario MunicipalPartnership Fund (OMPF), a new funding formula that is fairer and easier to understand than theprevious Community Reinvestment Fund (CRF) grant.

Ontario Municipal Partnership Fund

The Ontario Municipal Partnership Fund (OMPF) was introduced in 2005 to replace the Community Reinvestment Fund(CRF) as the Province’s main transfer program for funding municipalities. The OMPF is a fairer, more transparentprogram providing similar municipalities with similar funding. Through a clear and understandable system of grants, thenew model:

Ë assists municipalities with their social program costs;Ë includes equalization measures;Ë addresses challenges faced by northern and rural communities; andË responds to policing costs in rural communities.

Eligible municipalities will receive $656 million through the OMPF in calendar 2005. This represents an increase of$38 million, or 6.1 per cent, over CRF funding received in 2004.

16.8

37.4

20.730.9

18.2

6.628.1 4.6

9.3

9.4 4.0

3.6

9.45.1

4.6

4.18.8

0

10

20

30

40

50

60

Toronto Ottawa Windsor SudburyHealth, Education, Social Service & Public Administration ManufacturingProfessional, Scientific and Technical Services Finance, Insurance, Real Estate and LeasingForestry, Fishing, Mining, Oil and Gas

Source: Statistics Canada

Major Major EmploymentEmployment SectorsSectors, 2004, 2004Selected Selected CMAsCMAs

Share of Total Employment (%)


The government is also undertaking a range of initiatives to support the municipal sector, whichinclude the following:

Ë effective October 2004, providing municipalities with one cent per litre of Provincial gas taxrevenues. The share of Provincial gas tax revenues will increase to one and a half cents per litre inOctober 2005 and two cents per litre in October 2006. By the end of 2007-08, over $858 millionof Provincial gas tax revenues will be invested in 83 transit systems, serving 110 municipalities;

Ë working with Ontario municipalities to ensure they receive their fair share of the federal gas taxfunding;

Ë increasing the Provincial share of public health costs from 50 per cent in 2004 to 75 per cent by2007;

Ë implementing a new comprehensive affordable housing strategy with the Government of Canadato create more than 15,000 affordable housing units in Ontario’s municipalities;

Ë ensuring that the province’s drinking water remains clean and safe, the government is investing$209 million in infrastructure that treats and distributes water and that collects and treatswastewater. This is in addition to investments to be made through COMRIF. An additional$7 million, for a total of $49 million over five years, is being invested to help municipalities andothers map watersheds, analyse water quality and quantity in watersheds, and identify potentialthreats;

Ë bringing greater accountability and transparency to land-use planning by passing the StrongCommunities (Planning Amendment) Act, which puts planning decisions back in the hands ofmunicipalities; and

Ë strengthening the provincial-municipal relationship by signing an agreement with the Associationof Municipalities of Ontario (AMO) that gives municipalities a say in federal-provincialnegotiations that directly affect municipalities.

STRENGTHENING RURAL ECONOMIESThere are significant economic benefits that Ontario’s rural communities can derive from improvedeconomic linkages with their neighbouring cities and urban centres. Ontario is strengthening theseurban-rural networks, by encouraging neighbouring municipalities to pursue shared interests andcomplementary benefits that lever local diversity and promote growth and prosperity in all cities andregions.

As Ontario’s rural plan Strong Rural Communities notes, “The success Ontario enjoys as the economicengine of the country owes much to the strengths of our rich agriculture, forestry, mining andmanufacturing sectors. In fact, many auto parts manufacturers and their suppliers are located in ruralOntario.” Reflecting these strengths, rural communities have performed relatively well over the pasttwo decades, especially when compared to the rest of rural Canada.

To encourage future growth in Ontario’s rural communities, the government is focused onstrengthening the economic linkages between Ontario’s rural and urban centres by investing in theinfrastructure that links communities across the province, and the education and skills that will attract


investment and jobs. In keeping with these objectives, the government has launched a comprehensiveplan for rural Ontario that provides a policy framework to guide future investment.

Rural Investments

Ontario is contributing $298 million to the Canada-Ontario Municipal Rural Infrastructure Fund (COMRIF), a partnershipwith the federal government and municipalities that addresses local priorities in rural Ontario. Over five years, thisinitiative is expected to stimulate up to $900 million in infrastructure investments. Other rural investments include:

Ë $28 million in 2005-06 for Rural Economic Development (RED) projects;Ë $31 million, announced in September 2004, to strengthen programs, services and staffing in rural schools; andË $14 million in telemedicine technology in 2004-05 to deliver health care services to more remote Ontario

communities.

The Province has also provided support to grain and oilseed farmers, the cattle industry, and communities and farmerstransitioning from tobacco production.

A PLAN FOR NORTHERN PROSPERITYBuilding on the Northern Prosperity Plan announced in the 2004 Budget, the government remainscommitted to growing the northern economy and promoting the north as a region with untappedeconomic potential. Key elements of this plan include programs that market the north’s strengths topotential investors within Ontario and internationally, and initiatives to support northerners ininvesting in their own communities.

These and other initiatives are helping to reinvigorate Ontario’s northern communities, provideopportunities for youth in the region, and rekindle a spirit of optimism about the north’s future.

Recent employment growth in northern Ontario is encouraging. The region added 5,500 jobs in thelast year. Its two largest cities, Sudbury and Thunder Bay, recorded net job gains of 1,300 and 700respectively.

In 2005-06, the government will expand the Northern Prosperity Plan to include support for geologicalmapping that will open up the mining potential in the Far North. A total of $15 million will beinvested over three years.

Other initiatives to support northern communities include:

Ë Investment of approximately $297 million for northern Ontario highway rehabilitation andexpansion projects. This includes moving forward with the completion of four-laning projects onHighways 11 and 69, in seven and 12 years respectively.

Ë A renewed annual contribution of $60 million to support the Northern Ontario Heritage FundCorporation’s (NOHFC) new mandate. The new mandate focuses on private-sector job creation,youth, community development, emerging technologies, telecommunications and energy


conservation. In addition to this significant contribution, in 2005-06, NOHFC will spend$55 million for commitments made under the previous NOHFC mandate that focused oncommunity infrastructure initiatives.

Ë The Northern Ontario Grow Bonds pilot program. Issued exclusively to northerners, Grow Bondsoffer an annual return of four per cent for a fixed five-year term. Proceeds from approximately$13 million worth of bonds will be used to provide loans to new and growing businesses innorthern communities.

Ë $5 million to support the Government of Ontario (GO) North investor program, an internationalmarketing campaign launched in 2004 to showcase the north’s competitive advantages and attractlarge-scale investments to northern municipalities.

Ë Establishment of a new community-based nursing education pilot in northern Ontario.

Ë The new Northern Ontario School of Medicine will welcome its first class in the fall of 2005 ontwo main campuses in Thunder Bay and Sudbury. The school will have additional teaching andresearch sites across northern Ontario contributing to improving the health of people living insmall and large communities across this region.

Ë The government announced consultations on Provincial Land Tax (PLT) reform in the 2004Budget. The government is currently reviewing feedback from the consultations and will bereporting shortly.


ConclusionThis Budget outlines the government’s strategy to foster a strong, innovative economy and supportsthe objectives outlined in the fall 2004 Premier’s Progress Report Getting Results for Ontario: AProgress Report. The investments and initiatives outlined in this Budget will help to bring real,positive improvement to Ontario’s standard of living and enhance the productivity of Ontario’seconomy in years to come.

Underpinned by a firm commitment to fiscal discipline, the government’s plan for a new generation ofeconomic growth will:

Ë launch the McGuinty Government Plan for Postsecondary Education;

Ë maintain a competitive tax environment;

Ë modernize regulation;

Ë invest in key sectors;

Ë spur innovation;

Ë invest to renew and enhance Ontario’s physical infrastructure; and

Ë unlock the economic potential of Ontario’s cities and regions.

This strategy will make significant progress towards unlocking Ontario’s full potential. However,results could be achieved even faster with active support from Ontario’s municipal governments, aswell as federal government investments in Ontario commensurate with Ontario’s important role inCanada’s future prosperity.

With all stakeholders working together, Ontario can become the place to live, work and invest.


PAPER B: APPENDIXOntario’s Economic Outlook


Paper B: Ontario’s Economic Outlook 129

Introduction and OverviewThis appendix sets out the macroeconomic projections underlying the 2005 Budget fiscal plan.

Growth is expected to remain moderate in 2005, with real gross domestic product (GDP) increasing by2.0 per cent, reflecting the appreciation of the Canadian dollar, high oil prices and an easing in thepace of economic growth in the U.S. economy. These factors are expected to restrain employmentgains to 1.0 per cent, or 65,000 jobs, in 2005. Growth will be slower than in 2004, when Ontario realGDP rose by 2.6 per cent, rebounding from a series of shocks that slowed growth to 1.6 per cent in2003.

Over the longer term, the prospects for Ontario’s economic growth are brighter and real output isforecast to rise by 2.8 per cent in 2006, 3.4 per cent in 2007 and 3.3 per cent in 2008. This strongershowing will help raise the pace of job creation, lowering the unemployment rate and bringing aboutstronger income growth for Ontarians. Based on the outlook for growth in the economy, Ontario totaltaxation revenues are forecast to increase 4.1 per cent in 2005-06 and by an average of 4.9 per centover the following three years.

Ontario Economic Highlights(Annual Average, Per Cent)

2003 2004 2005p 2006p 2007p 2008pReal GDP Growth 1.6 2.6 2.0 2.8 3.4 3.3Nominal GDP Growth 3.1 4.7 3.9 4.6 5.3 5.3Unemployment Rate 7.0 6.8 6.7 6.5 6.3 6.1CPI Inflation 2.7 1.9 2.1 1.9 1.8 1.8p = projection.Sources: Statistics Canada and Ontario Ministry of Finance.


Ontario Real GDP Growth ProjectionsOntario Real GDP Growth ProjectionsMinistry of Finance Compared to the Average PrivateMinistry of Finance Compared to the Average Private--Sector ForecastSector Forecast

2.3

2.9

3.7 3.73.33.4

2.8

2.0

0

1

2

3

4

5

2005 2006 2007 2008

Average Private SectorMinistry of Finance

Per Cent

Sources: Ontario Ministry of Finance and Ontario Ministry of Finance Survey of Forecasts (May 2005).

Private-Sector Economic ForecastsThe Ontario Government draws on private-sector economic forecasts as a guide forbuilding prudent economic projections onwhich to establish revenue forecasts. Typically, the assumptions about economicgrowth in budgets have been below theaverage prediction of private-sectorforecasts. The chart to the right comparesthe average private-sector forecast forOntario real growth over the next four yearswith the assumptions used in the Budget.

The following table shows the projectionsfor Ontario real economic growth ofprivate-sector forecasters.

Current Private-Sector Forecasts for Ontario Real GDP Growth(Per Cent)

2005 2006 2007 2008Conference Board (April) 2.1 2.9 3.4 3.4Global Insight (January) 2.8 2.7 3.9 3.8Centre for Spatial Economics (April) 2.4 3.3 3.6 3.6University of Toronto (April) 1.4 3.1 4.0 3.8Bank of Montreal (April) 2.7 3.6 – – RBC Financial (March) 2.4 3.0 – – Scotiabank (March) 1.9 2.0 – – TD Bank (March) 2.2 3.2 – – Nesbitt Burns (April) 2.4 2.8 – – CIBC World Markets (March) 2.2 2.8 – – Average 2.3 2.9 3.7 3.7Source: Ontario Ministry of Finance Survey of Forecasts (May 2005).

The Fiscal Transparency and Accountability Act provides for a mechanism that will refine andincrease the openness of the economic assumptions used in budget-making. The Act directs theMinister of Finance to establish an Economic Forecast Council to “provide advice relating tomacroeconomic forecasts and assumptions to be used to prepare the Budget and the related fiscalplan.” Meeting with private-sector economists early in the budget-preparation process helped toinform the Budget’s economic and fiscal projections. It also provided a forum for professional adviceabout policy priorities and the economic challenges that Ontario faces.


The Economic EnvironmentOntario is part of an interconnected global economy. In 2004, international exports of goods andservices were equivalent to 44.5 per cent of total nominal GDP. This means the health and growth ofthe Ontario economy depend to a large degree on developments beyond its borders, and especially onthe state of the U.S. economy. Each sustained percentage point increase in U.S. real growth adds0.3 to 0.7 percentage points to real growth in Ontario in the first year. The range largely reflects thefact that the impact on Ontario growth depends on the specific source of the change of U.S. growth.

Although the private-sector economists who met with the Minister of Finance agreed that the mostprobable outcome for the Ontario economy was one of continued growth, they stressed the need to beaware of and take into consideration the risks that could arise from potentially adverse developmentsin the world economy.

Ontario’s international trade, for example, depends on the path of Canada’s exchange rate. Estimatesbased on historical relationships suggest that a five-cent rise in the Canadian dollar against its U.S.counterpart reduces Ontario growth by 0.2 to 0.9 percentage points in the first year. This wide rangereflects a number of uncertainties, such as the extent to which firms pass through lower costs forimports, because of the higher Canadian dollar, to prices for goods and services in Canada.

The prices of key commodities upon which Ontario producers rely, such as crude oil, are determinedin world markets. Conflicts in other parts of the world can materially affect these prices. A sustained$10 US per barrel increase in the price of world crude oil trims Ontario’s real growth by 0.3 to 0.7percentage points in the first year. This impact also assumes natural gas prices rise in the sameproportion as oil prices, since they are substitute sources of energy. The range is due in part touncertainty regarding the degree to which higher energy costs increase consumer prices. Furthermore,the contractionary impact of higher world oil prices on U.S. demand hurts Ontario exports.

Interest rates also influence the Ontario economy. Interest rates paid by Ontario borrowers are tied torates that markets set for Government of Canada bonds, which are highly liquid. Canadian debt tradesin integrated world markets and will be influenced by global financial conditions as well as by howinvestors perceive the risks and opportunities in particular countries.

The following table shows the average private-sector forecast of some of these key external variables.


Key External Factors That Affect the Ontario EconomyAverage Private-Sector Forecast

Actual Forecast2003 2004 2005 2006

Canadian Dollar (Cents US) 71.4 76.8 82.0 82.4Crude Oil ($ US per Barrel) 31.1 41.4 49.1 44.5U.S. Real GDP Growth (Per Cent) 3.0 4.4 3.4 3.3Short-Term Interest Rates (Per Cent) 2.9 2.2 2.6 3.3Sources: Bank of Canada, U.S. Bureau of Economic Analysis, Consensus Economics (April 2005), Blue Chip Economic Indicators(May 2005) and Ontario Ministry of Finance Survey of Forecasts (May 2005).

To the extent that the actual path of these external factors differs from the assumptions, economicgrowth will tend to be faster or slower. The table below shows the typical range of these impacts.

Impact of Changes in Key Assumptions on Ontario Real GDP Growth*(Percentage Point Change)

First Year Second YearCanadian Interest Rates Increase by One Percentage Point -0.1 to -0.5 -0.2 to -0.6U.S. Real GDP Growth Increases by One Percentage Point +0.3 to +0.7 +0.4 to +0.8Canadian Dollar Appreciates by Five Cents US -0.2 to -0.9 -0.7 to -1.4World Crude Oil Prices Increase by $10 US Per Barrel -0.3 to -0.7 -0.1 to -0.5*Impacts based on changes being sustained.Source: Ontario Ministry of Finance.

The revenue forecast in the 2005 Budget is based on the economic projections set out in this appendix. The following table shows the sensitivity of Ontario revenues to changes in projected economicgrowth. These are average estimates. Actual results could vary significantly depending on how theunderlying economic components differ from the original forecast.

Cumulative Impact of Changes in Economic Assumptions on Ontario Revenues($ Millions)

Full Year2005-06 2006-07 2007-08

Sustained One Percentage Point Higher Real GDP Growth 615 1,290 2,030Source: Ontario Ministry of Finance.

A sustained one percentage point decrease in real GDP growth would result in revenue declines in linewith the increases estimated above.


U.S. Real GDP GrowthU.S. Real GDP Growth

1.9

3.0

4.4

3.4 3.3 3.2 3.0

0

1

2

3

4

5

2002 2003 2004 2005p 2006p 2007p 2008p

Per Cent

p = private-sector survey average.Sources: U.S. Bureau of Economic Analysis and Blue Chip Economic Indicators (May 2005).

A Growing U.S. MarketThe U.S. economy grew by 4.4 per cent in real terms in 2004, the fastest annual gain since 1999. Economic growth was broadly based, with both the household and business sectors contributing to therise, providing healthy markets for Ontario exports. Consumer spending was led by strong gains infurniture and household items, boosted by a robust housing market that recorded its strongest gainsince 1992. Auto sales were 17.3 million units, a high level, but just matching the average pace ofsales during the previous five years. In the business sector, solid demand helped corporation profitsrecord a third straight double-digit gain, allowing firms to maintain healthy balance sheets and strongcash flow. As a result, firms boosted investment in machinery and equipment, with outlays rising13.6 per cent in 2004.

Economists expect continued growth in the U.S. economy, although at a moderating pace. Accordingto the Blue Chip Economic Indicators survey, the U.S. economy is expected to grow by 3.4 per cent in2005, 3.3 per cent in 2006, 3.2 per cent in 2007 and 3.0 per cent in 2008.

Continued growth may be tested by anumber of risks and imbalances. Thestrength of consumer spending has been themain driving force of the U.S. economysince 2001. However, high personal debtlevels, rising interest rates and high oilprices are beginning to temper gains inpersonal consumption. In 2004, realpersonal spending rose at a slower rate thanoverall GDP for the first time since 1997.


U.S. Fiscal BalanceU.S. Fiscal Balance

-500

-300

-100

100

300

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003

$ Billions US

Source: U.S. Office of Management and Budget.

U.S. Current Account BalanceU.S. Current Account Balance

-700

-500

-300

-100

100

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003

$ Billions US

Source: U.S. Department of Commerce.

There are also growing concerns about the massive U.S. current account deficit, which reached arecord $665.9 billion US in 2004, representing 5.7 per cent of GDP. The current account deficit wasaccompanied by a record $412 billion US federal fiscal deficit. Tax cuts and significant governmentspending growth have stimulated the very strong pace of consumer spending, boosting imports andraising the trade deficit. To maintain this rate of consumption, the U.S. economy must borrow fromthe rest of the world. If investor demand for U.S. assets were to weaken, interest rates could risesharply, leading to a deterioration of consumer and business demand. Export-oriented Ontario, withclose links to the U.S. economy, would be harmed by such a development.


Adjusting to a Stronger Canadian DollarThe Canadian dollar appreciated from 64.9 cents US in January 2003 to a peak of over 85 cents US inNovember 2004, a 12-year high. Since then, the dollar has eased and traded at close to 80 cents US atthe end of April 2005. Over the same period, the trade-weighted value of the U.S. dollar declined bynearly 11 per cent.

The rapid appreciation of the Canadian dollar over the past two years is unprecedented and has createda significant challenge for Ontario exporters. In a survey by the Bank of Canada released in January2005, over half of the responding firms reported being hurt by the higher dollar, with businesses in themanufacturing and resource sectors being hardest hit. The appreciation has lowered profit margins forexporters, and in some cases has reduced export volumes.

In response to the higher dollar, businesses are cutting costs and working to raise productivity. Investment in productivity-enhancing machinery and equipment is made easier by the strong currency,because it lowers the price Ontario companies pay. About 60 per cent of Ontario machinery andequipment is imported, mainly from the United States. Firms have also contained production costs byexpanding their use of inputs imported from low-cost producers.

The appreciation of the Canadian dollar has benefited Ontario consumers by lowering prices ofimported goods and helping to offset some of the impact of higher prices for oil.

At present, there is a wide divergence among projections of the exchange rate. Private-sector forecastsfor the average value of the Canadian dollar in 2005 range from a low of 79.3 cents US to a high of85.0 cents US. This translates into a range of 78.3 to 88.9 cents US by the end of the year, a far widerrange than usually found.

Private-Sector Forecasts for the Canadian Dollar (Cents US)

2003 2004 2005p 2006p 2007p 2008p Average 71.4 76.8 82.0 82.4 82.1 83.0 High – – 85.0 93.4 86.4 85.9 Low – – 79.3 76.2 79.6 81.2p= private-sector survey average.Sources: Bank of Canada and Ontario Ministry of Finance Survey of Forecasts (May 2005).


Canadian DollarCanadian Dollar

60

70

80

90

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05p06p07p08p

Cents US, Annual Average

p = projection.Sources: Bank of Canada and Ontario Ministry of Finance.

The planning projections in the Budgetassume the Canadian dollar will average82.8 cents US in 2005, and graduallyappreciate to an average of 84 cents US by2008. Canadian inflation is expected toremain somewhat below U.S. inflation overthis period, so the real exchange rate isexpected to remain fairly stable.


Ontario Real International and Ontario Real International and InterprovincialInterprovincial TradeTrade

7.8

-2.4

1.5

-0.6

5.1

2.03.6

7.3

-4.6

1.83.8

7.0

4.93.8

-8-6-4-202468

10

2000 2001 2002 2003 2004 2005p 2006-08p

Exports Imports

Per Cent Change

p = projection.Sources: Statistics Canada and Ontario Ministry of Finance.

Exports Under PressureOntario’s international exports were valued at $230.5 billion in 2004, equivalent to 44.5 per cent ofcurrent-dollar GDP. The United States accounted for over 90 per cent of Ontario’s internationalmerchandise exports in 2004. Despite the rapid appreciation of the Canadian dollar, Ontario realexports grew 5.1 per cent in 2004, after dropping in two of the previous three years. The pickup inexport growth in 2004 reflected the strongest global economic growth in nearly three decades. This,combined with a high level of U.S. auto sales and a double-digit gain in machinery and equipmentinvestment expenditures by U.S. businesses, helped boost Ontario’s export volumes. The gain,however, was concentrated in the first half of 2004 and exports declined in the second half of the year.

Real exports are expected to grow by 2.0 per cent in 2005, followed by an annual average gain of3.6 per cent a year during the 2006 to 2008 period.

The pace of export growth reflects continued,though moderating, growth in the worldeconomy and the adjustment of exporters tothe higher value of the Canadian dollar.

Private-sector forecasters expect U.S. autosales to decline slightly in 2005 to a still-impressive 17.0 million units, down from17.3 million in 2004. However, some modelsproduced at Ontario auto-assembly plants arelosing market share in the United States andmay struggle to match sales levels achieved in2004. The auto sector is crucial for theOntario economy and accounted for 45.3 per cent of the province’s merchandise exports to the UnitedStates in 2004.

Machinery and equipment sales accounted for 14.5 per cent of the province’s merchandise exports tothe United States in 2004. Forecasters expect U.S. real investment on equipment and software toincrease by 12.4 per cent in 2005, the second straight double-digit annual gain. However, growth inthe non-computer segment, which is more relevant for Ontario exporters, is expected to be a moremoderate 7.0 per cent in 2005 and to decline by an average of 0.4 per cent a year from 2006 through2008.


China’s Share of Ontario Merchandise ImportsChina’s Share of Ontario Merchandise Imports

2.0 2.0 2.1 2.3 2.42.8

3.23.7

4.7

5.7

0

1

2

3

4

5

6

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Per Cent of Total Merchandise Imports

Source: Statistics Canada.

Ontario Exports to Other ProvincesOntario Exports to Other Provinces

30

40

50

60

70

80

90

100

81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04

$ Billions


In recent years, China has surged ahead asa major exporting nation and becomeOntario’s second-largest two-way tradingpartner. Ontario merchandise importsfrom China grew more than fourfold from1995 to 2004, with the share of totalimports rising from 2.0 to 5.7 per cent.

Canada’s other provinces and territoriesare also important trading partners forOntario. Interprovincial exports totalled$95.2 billion in 2004, while imports fromother provinces reached $70.5 billion. Private-sector forecasters expect Canadianreal GDP growth of 2.6 per cent in 2005,stronger than their projection for the Ontarioeconomy. On balance, other parts ofCanada benefit more than Ontario from highcommodity prices because primaryindustries such as forestry, mining andagriculture make up a larger share of theireconomies. Healthy economies in the restof Canada, in turn, support growth in themarket for Ontario goods and services.


1010--Year Government of Canada Bond RateYear Government of Canada Bond Rate

0

2

4

6

8

10

12

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05p06p07p08p

Per Cent

p = private-sector survey average.Sources: Bank of Canada and Ontario Ministry of Finance Survey of Forecasts (May 2005).

Stable Interest Rates and Low Inflation The Bank of Canada has held interest rates steady since October 2004, when the past appreciation ofthe Canadian dollar began to constrain growth and reduce any prospects of inflation. This is expectedto continue until later in the second half of this year, when economic growth is projected to accelerate.

Private-sector forecasters expect Canadian three-month treasury bill rates to rise slightly, from anaverage of 2.2 per cent in 2004 to 2.6 per cent in 2005 and 3.3 per cent in 2006. Ten-year Governmentof Canada bond yields are projected to increase by a smaller amount, rising from an average of 4.5 percent in 2005 to 5.0 per cent in 2006, consistent with ongoing economic growth and contained inflation.

Since June 2004, the U.S. Federal ReserveBoard has raised interest rates eight times fora total of 200 basis points, bringing its keytarget for the federal funds rate to 3.0 percent. As a result, Canadian short-term interestrates are below comparable U.S. rates for thefirst time in close to four years. The FederalReserve is widely expected to continuelifting interest rates gradually, implying awidening negative Canada-U.S. rate gap forthe rest of the year.

Canadian Interest Rate Outlook (Annual Per Cent)

2003 2004 2005p 2006p 2007p 2008p3-month Treasury Bill Rate 2.9 2.2 2.6 3.4 4.3 4.710-year Government Bond Rate 4.8 4.6 4.6 5.2 5.7 6.0Ontario CPI Inflation Rate 2.7 1.9 2.1 1.9 1.8 1.8p= projection.Sources: Bank of Canada, Statistics Canada and Ontario Ministry of Finance.

The Bank of Canada aims at core inflation of two per cent, the midpoint of its one to three per centtarget range. The Bank’s favoured measure of core inflation (the CPI excluding the eight most volatileitems and the effect of changes in indirect taxes) has remained below two per cent throughout 2004and into early 2005. This gives the Bank scope to keep interest rates low and support economicgrowth.


Ontario CPI Inflation OutlookOntario CPI Inflation Outlook

2.7

1.92.1

1.9 1.8 1.8

0

1

2

3

2003 2004 2005p 2006p 2007p 2008p

Per Cent


Crude Oil PricesCrude Oil Prices

0

10

20

30

40

50

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005p 2006p

$ US per barrel, West Texas Intermediate

p = private-sector survey average.Source: Consensus Economics (April 2005).

The Ontario CPI inflation rate is expected toaverage 2.1 per cent in 2005, similar to the1.9 per cent rate recorded in the previousyear. Over the 2006 to 2008 period, inflationis projected to average slightly less than twoper cent a year.

The limited movement of Ontario inflationwithin the Bank of Canada’s target rangelikely will be shaped by two main factors:oil prices and the exchange rate.

In early April 2005, the price of crude oilreached an all-time high of over $58 US perbarrel, a reflection of tight supply conditionsand continued strong demand. Private-sectorforecasters expect the average price to be18.6 per cent higher in 2005 than in 2004. Forecasters generally expect slower globaleconomic growth to trigger lower crude oilprices as 2005 unfolds, with crude projectedto ease to $48.80 US per barrel by July 2005and $44.70 US in a year’s time. However,futures markets are less optimistic, expectingcrude oil to trade above $50 US per barrelthroughout 2005. For the purposes of thisbudget, oil prices are assumed to average$51.40 US per barrel in 2005. High oil andgas prices are the primary reason for the modest growth forecast in Ontario Gasoline Tax revenues(1.1 per cent) in 2005-06.

The Canadian dollar’s appreciation of about 25 per cent since 2003 has lowered the cost of importedgoods for consumers and businesses. About half of the durable goods consumed by Ontarians areimported.

Wage settlements averaged 3.0 per cent during 2004, similar to the experience of the past few years. Wage settlements are expected to moderate in 2005, helping to keep inflationary pressures in check.


Risks From Financial Markets

The assumption of financial market stability, sustained low inflation and stable interest rates is subject to significant andvaried risks. One important area of concern is the potential for sharply higher inflation in the United States. Markets havebecome accustomed to moderate, well-contained inflation and this has helped maintain low nominal interest rates.U.S. demand continues to grow at a healthy pace and may be pushing the limits of productive capacity at the same timeas the depreciating U.S. dollar is putting upward pressure on import prices. Despite these pressures, inflation hasremained moderate. Should the balance of forces resulting in low inflation be disrupted by rising commodity prices,abrupt U.S. dollar depreciation or slower productivity growth, there is a danger of interest rates rising faster and higherthan expected. Under such circumstances, the Bank of Canada could be under pressure to raise domestic interest rates. Higher rates could hinder Canada's economic growth, even as U.S. economic growth falters.

Risks such as these, arising from external forces, make it important to establish Ontario’s fiscal plan on a prudent basis.


Ontario EmploymentOntario Employment

6,000

6,200

6,400

6,600

6,800

2004 2005p 2006p 2007p 2008p

Thousands


Ontario Unemployment RateOntario Unemployment Rate

6.86.7

6.5

6.3

6.1

5.5

6.0

6.5

7.0

2004 2005p 2006p 2007p 2008p

Per Cent


Continued Job GrowthOntario total employment rose 1.7 per centin 2004, representing a net increase of108,000 jobs. Full-time jobs, which rose by111,500 new positions, accounted for all ofthe net gain in employment last year. On anindustry basis, the service sector, includingwholesale and retail trade, health care, andfinance, insurance and real estate, ledemployment gains in 2004.

As Ontario businesses adjust to the steepappreciation of the Canadian dollar and costpressures from high oil prices, employmentgrowth is forecast to slow to 1.0 per cent in2005, a gain of 65,000 jobs. Employment gains are expected to firm up during the 2006 to 2008period, averaging close to 2.0 per cent a year. Stable gains in employment are projected to steadilylower Ontario’s unemployment rate to 6.1 per cent by 2008. Over the same period, the rate of labour-force participation is expected to climb modestly to 68.5 per cent.

Steady gains in employment will createrising incomes for Ontario workers. Wagesand salaries are forecast to rise by 3.6 percent in 2005 and an average of 5.3 per centduring 2006 to 2008. Personal income isexpected to increase 3.8 per cent in 2005and by an average of 4.9 per cent over thefollowing three years, providing the basisfor growing household spending on goodsand services. Based on the outlook forrising employment, wages and incomes,Ontario’s Personal Income Tax revenues areforecast to increase 4.9 per cent in 2005-06and by an average of 6.7 per cent over thefollowing three years. Likewise, Employer Health Tax revenues are forecast to increase 3.8 per centin 2005-06 and by an average of 4.4 per cent over the following three years.


Canadian Household Debt Interest CostsCanadian Household Debt Interest Costs

6.06.57.07.58.08.59.09.5

10.0

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

Per Cent of Personal Disposable Income

Sources: Department of Finance Canada and Statistics Canada.

Average

Ontario Consumer ConfidenceOntario Consumer Confidence

708090

100110120130140150

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

Index, 1991 = 100

Source: Conference Board of Canada.

Average

Household Sector to Post Modest GainsConsumer spending is expected to continuegrowing over the forecast period, reflectinghealthy household balance sheets,continuing low interest rates and risingincomes. Real consumer spending isprojected to rise 2.6 per cent in 2005, easingfrom the 3.2 per cent rate posted in 2004. Over the 2006 to 2008 period, householdspending growth is projected to average3.1 per cent a year. Rising house valueshave boosted household wealth,contributing to the willingness and capacityof households to increase spending. Basedon the outlook for increased personalspending, Ontario Retail Sales Tax revenues are forecast to increase 3.8 per cent in 2005-06 and by anaverage of 5.5 per cent over the following three years.

The strong pace of Ontario housing marketactivity contributed to vigorous personalspending on household-related items in2004. Home resales hit a record high lastyear, climbing 7.0 per cent. Sales of newhomes also remained strong. Homefurnishing stores registered sales growth of19.0 per cent. Home centre and hardwarestore sales rose 7.9 per cent in 2004, thefourth consecutive annual increase.

Although household debt levels havecontinued to rise, partly a result of robusthome buying in recent years, the cost ofcarrying debt is low by historical standards. Low interest rates and steadily rising personal disposableincomes have contributed to the healthy position of household finances. The ratio of Canadianhousehold debt costs to personal disposable income was 7.7 per cent in the fourth quarter of 2004,below the average of 8.1 per cent over the 1980 to 2004 period. The ratio has remained relativelystable over the past three years, ranging between 7.5 and 7.8 per cent. The level of consumerconfidence in 2004, as measured by the Conference Board of Canada, was the third highest in the past16 years. The consumer confidence index is currently 7.5 percentage points above the averageprevailing since 1980.


Mortgage Payments as a Share of Mortgage Payments as a Share of AfterAfter--Tax Household IncomeTax Household Income

10152025303540

85 87 89 91 93 95 97 99 01 03 05p 07p

Per Cent

p = projection.Sources: Bank of Canada, Canada Real Estate Association, Statistics Canada and Ontario Ministry of Finance.

The housing market is expected to be fairly stable in 2005. During the past nine years, Ontariohousing starts have trended higher. In 2003 and 2004, housing starts averaged just over 85,000 unitsannually, the strongest two-year pace of building activity since 1988 and 1989. Unlike the housingboom of the late 1980s, the current market is not characterized by speculative and unsustainableincreases in home prices.

Over the 2005 to 2008 period, starts areprojected to moderate. Housing starts areforecast to reach 75,400 units in 2005 andan average of 74,800 units per year over the2006 to 2008 period. The continuedstrength of the housing market reflectshistorically low mortgage rates and risingdisposable incomes, which help keep homeownership affordable. This, combined withcontinued strong levels of immigration, willencourage high levels of housing demandand construction.

Average five-year mortgage rates haveremained steady near six per cent since mid-December, down from a peak of 6.7 per cent in July 2004. Borrowers can usually negotiate mortgage rates lower than those published by financial institutions.

Sales of existing homes rose 7.0 per cent to reach a record level of 197,354 in 2004, marking thefourth consecutive year of record home resales in Ontario. The average price of a resale home inOntario climbed 8.1 per cent to $245,229 in 2004, the highest on record. Resale home prices haveincreased steadily since 1995 and have risen faster than the rate of CPI inflation over the past eightyears. However, the housing market appears to be in the midst of a period of sustainable, non-speculative growth, unlike the experience of the late 1980s. From 1982 through 1989, average resalehome prices jumped by nearly 160 per cent, more than three times the 49.3 per cent gain recordedduring the most recent seven years.

Nonetheless, modestly higher interest rates in the second half of this year are expected to lead to agradual easing of housing activity, keeping the market from overheating, yet without causing anabrupt deterioration in home affordability. The average private-sector forecast calls for the number ofexisting home sales to ease by 1.9 per cent in 2005 and 4.1 per cent in 2006, with average resale houseprices rising by 4.4 per cent in 2005 and 3.8 per cent in 2006. Based on the housing market outlook,Ontario Land Transfer Tax revenues are forecast to remain at their 2004-05 level in 2005-06.


Business Balance Sheets Are StrongBusiness Balance Sheets Are Strong

0.85

0.90

0.95

1.00

1.05

1.10

1.15

1988 1990 1992 1994 1996 1998 2000 2002 2004

Canadian Ratio of Debt-to-Equity


Profits Subject to Far More Variation Profits Subject to Far More Variation Than Total Ontario GDPThan Total Ontario GDP

-40

-20

0

20

40

60

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

Pre-Tax Corporate ProfitsNominal GDP

Per Cent Change

Sources: Statistics Canada and Ontario Ministry of Finance.

Strong Business InvestmentBusiness investment spending on machineryand equipment has contributed to Ontarioeconomic growth during the past two years,with outlays rising by 7.2 per cent in 2003and 7.4 per cent in 2004, the largest gainsince 1999. Commercial and industrialconstruction, on the other hand, declined inboth 2003 and 2004. The strong pace ofmachinery investment has been the outcomeof a supportive investment environment,including rising demand in the globaleconomy, a high level of profits, improvingcorporate balance sheets, a high rate ofcapacity utilization, lower capital equipmentprices and competitive pressures to adopt new technology.

Currently, Canadian manufacturing industries are operating at a record-high 88.5 per cent capacityutilization rate, with the industrial sector operating at 86.0 per cent, the highest rate in 16 years.

Strong growth in corporation profits was an important source of funds for business investmentspending in 2004. Pre-tax corporation profits increased by 13.8 per cent last year, with both financialand non-financial firms recording gains. Corporate profits were equivalent to 12.9 per cent of GDP in2004, the highest in 30 years. While relatively low interest rates and strong growth in the UnitedStates will support profits this year, the high dollar will act to dampen growth. Corporation profits areexpected to grow by 3.0 per cent in 2005 and an average of 4.2 per cent from 2006 through 2008.

Profits are much more volatile than theeconomy as a whole. Since 1990, theannual change in profits has ranged from adecline of 28 per cent to a rise of 56 percent. That range is 10 times more than thecorresponding variability of nominal GDPgrowth. Profits are likely to be just asvolatile in the future as in the past. Themoderate, steady projection of profitgrowth, at a rate somewhat below that fornominal GDP, is intended to serve as aprudent planning assumption rather than aforecast that future profits will be stable. Given the volatility of corporate profit


Real Business InvestmentReal Business Investment

-0.3

1.3

-3.2-5.1

1.83.1 3.0 3.1

-3.0-5.0

7.2 7.4

10.3

6.65.4 5.3

-8

-4

0

4

8

12

2001 2002 2003 2004 2005p 2006p 2007p 2008p

Commercial & Industrial Construction

Machinery & Equipment Investment

Per Cent Change


growth and the exceptionally high level of revenues attained in 2004-05, Ontario Corporation Taxrevenues are cautiously forecast to decline 2.8 per cent in 2005-06 and increase by an average of1.8 per cent over the following three years.

According to Statistics Canada’s investment intentions survey published in February, Ontariobusinesses intend to increase nominal investment spending in 2005 by 8.6 per cent for equipment and1.9 per cent for structures.

Real investment in machinery andequipment is forecast to rise by 10.3 percent in 2005 and 5.8 per cent a year duringthe 2006 to 2008 period. Since Ontariofirms import about 60 per cent of theircapital equipment, mainly from the UnitedStates, the higher Canadian dollar hassubstantially lowered the cost of investingin machinery and equipment. This isencouraging business investment inproductive capital and enhancing Ontario’slong-term competitiveness.

After declining in four of the past fiveyears, non-residential investment outlays are expected to increase by 1.8 per cent in 2005, and thencontinue to rise by an average of 3.1 per cent from 2006 through 2008.


3.4 3.32.9

2.22.0

1.6 1.6 1.5

0

1

2

3

4

Ontario U.S. Canada France U.K. Italy Japan Germany

Ontario and GOntario and G--7 Economic Growth7 Economic Growth2006 to 2008 Average Real GDP Growth, Per Cent

Sources: Consensus Forecasts (April 2005) and Ontario Ministry of Finance Survey of Forecasts (May 2005).

Positive Long-Term Economic ProspectsPrivate-sector forecasters are optimisticabout the future growth prospects ofOntario. The consensus forecast calls forreal GDP growth to average 3.4 per cent ayear during the 2006 through 2008 period,ahead of all G-7 countries.

The measures announced in this Budget willhelp enhance prosperity and strengthen thelong-term potential for growth. Investing inthe knowledge and skills of workers,renewing our infrastructure, promotinginnovation and supporting an environmentthat encourages business investment and jobcreation form the policy framework that will achieve Ontario’s economic potential.


Annex A: Details of the Ontario Economic Outlook

The Ontario Economy, 2003 to 2008(Per Cent Change)

Actual Projected2003 2004 2005 2006 2007 2008

Real Gross Domestic Product 1.6 2.6 2.0 2.8 3.4 3.3 Personal consumption 3.2 3.2 2.6 2.9 3.2 3.1 Residential construction 4.5 4.2 0.8 1.3 2.4 2.5 Non-residential construction -3.2 -5.1 1.8 3.1 3.0 3.1 Machinery and equipment 7.2 7.4 10.3 6.6 5.4 5.3 Exports -0.6 5.1 2.0 3.4 3.7 3.9 Imports 3.8 7.0 4.9 3.8 3.7 4.0Nominal Gross Domestic Product 3.1 4.7 3.9 4.6 5.3 5.3Other Economic Indicators Retail sales 3.4 3.2 4.0 3.9 4.0 4.4 Housing starts (000s) 85.2 85.1 75.4 74.3 74.5 75.5 Personal income 2.6 3.6 3.8 4.6 4.9 5.1 Wages and salaries* 3.1 3.7 3.6 5.0 5.4 5.4 Corporate profits -1.7 13.8 3.0 4.0 4.0 4.5 Consumer Price Index 2.7 1.9 2.1 1.9 1.8 1.8Labour Market Employment 2.9 1.7 1.0 1.8 2.0 2.0 Job creation (000s) 173 108 65 118 130 131 Unemployment rate (per cent) 7.0 6.8 6.7 6.5 6.3 6.1*Includes supplementary labour income.Sources: Statistics Canada, Canada Mortgage and Housing Corporation and Ontario Ministry of Finance.


Annex B: Comparison to the 2004 BudgetOntario’s actual growth in 2004 slightly exceeded last year’s Budget projection of 2.3 per cent, andthe composition was somewhat different than expected. Retail sales grew by only 3.2 per cent last yearcompared to the 2004 Budget projection of 3.5 per cent. Housing starts were 85,114 units in 2004,ahead of the Budget assumption of 77,600. Both corporation profits and personal income were higherthan anticipated in the May 2004 Budget.

The outlook for Ontario growth in 2005 and 2006, however, has deteriorated since the Budget of May2004. As seen in the table below, Ontario real GDP is expected to grow by 2.0 per cent in 2005 and2.8 per cent in 2006, down from last year’s Budget assumption of 3.2 and 3.3 per cent, respectively. The growth of nominal GDP, corporation profits and retail sales is also lower than projected in lastyear’s Budget.

The weakening in the province’s near-term economic prospects mainly reflects the impacts of thesharp appreciation of the Canadian dollar and high oil prices. As the impact of these two forces fades,growth is expected to improve to 3.4 per cent in 2007 and 3.3 per cent in 2008.

Changes in Key Economic Forecast Assumptions, 2004 Budget Compared to 2005 Budget(Per Cent Change)

2004 2005 2006 2007

Budget Actual Budget of Budget of Budget of2004 2004 2005 2004 2005 2004 2005

Real GDP 2.3 2.6 3.2 2.0 3.3 2.8 3.4 3.4

Nominal GDP 4.1 4.7 5.0 3.9 5.2 4.6 5.3 5.3

Corporate Profits 5.8 13.8 4.9 3.0 5.0 4.0 5.9 4.0

Retail Sales 3.5 3.2 4.1 4.0 4.1 3.9 4.3 4.0

Housing Starts (000s) 77.6 85.1 76.0 75.4 75.0 74.3 74.0 74.5

Employment 1.7 1.7 1.8 1.0 2.0 1.8 2.1 2.0

Job Creation (000s) 104 108 114 65 132 118 140 130

Personal Income 3.4 3.6 4.5 3.8 4.8 4.6 4.9 4.9Sources: Statistics Canada, Canada Mortgage and Housing Corporation and Ontario Ministry of Finance.


Average PrivateAverage Private--Sector Forecast of Ontario Sector Forecast of Ontario Real GDP GrowthReal GDP GrowthMay 2004 Compared to May 2005May 2004 Compared to May 2005

3.5 3.4 3.43.7

2.9

2.3

0

1

2

3

4

5

2005 2006 2007

May 2004 May 2005

Per Cent

Source: Ontario Ministry of Finance Survey of Forecasts.

Private-sector forecasts for Ontarioeconomic growth in 2005 and 2006 havealso been reduced from the projectionsmade at the time of the 2004 Budget. Forecasters now anticipate a strongerrebound will be underway in 2007.

PAPER CDetails of Revenue Measures


Paper C: Details of Revenue Measures 153

Paper C: Details of Revenue MeasuresThis paper provides further information on the revenue measures proposed in the Budget. For preciseinformation, the reader is advised to consult the amending legislation.

INCOME TAX ACTOntario Property and Sales Tax Credits for SeniorsLast year, the government announced the first enrichment of the Ontario Property and Sales TaxCredits for Seniors since the inception of the program in 1992. Lower-income seniors who own orrent their homes are now eligible for additional assistance as a result of an increase to the underlying“basic” property tax credit amount of $125 and an equivalent increase to the maximum benefitavailable for these credits.

For the first time, as a result of increased amounts for the federal Old Age Security and GuaranteedIncome Supplement programs, the minimum level of income guaranteed by the government, includingOntario’s Guaranteed Annual Income System (GAINS), for qualifying Ontario senior couples is risingabove $22,000 for 2005. This is the income threshold above which Ontario Property and Sales TaxCredits for Seniors are reduced.

The government proposes to increase the income threshold for senior couples in 2005 to ensure thatthose couples receiving the guaranteed minimum level of income support retain their full OntarioProperty and Sales Tax Credits benefit. The income threshold for single seniors will remainunchanged because their guaranteed minimum level of income support remains below the $22,000threshold in 2005.

Concordance with the Income Tax Act (Canada)The government proposes to parallel, with any necessary modifications, a number of tax measures asthey apply to non-refundable tax credits announced in the 2005 federal budget and other federalreleases, subject to the passage of federal legislation:

Ë enhancements relating to amounts that can be claimed for dependants through the MedicalExpense Tax Credit, effective for the 2005 taxation year; and

Ë a non-refundable tax credit for eligible adoption expenses, effective for the 2005 taxation year.

Other proposals announced by the federal government would be automatically adopted once federallegislative and regulatory changes have been approved. These include:

Ë changes allowing specific charitable donations, made before January 12, 2005 in relation to theAsian tsunami disaster, to be claimed by Ontario taxpayers either in 2004 or 2005; and


Ë various enhancements to the Disability Tax Credit and Medical Expense Tax Credit, effective forthe 2005 taxation year.

CORPORATIONS TAX ACTOntario Film and Television Tax Credit and Ontario Production Services Tax CreditThe Ontario Film and Television Tax Credit (OFTTC) is a refundable tax credit for Ontario labourexpenditures incurred by Ontario-based, Canadian-controlled production companies producing eligiblefilm and television productions in Ontario.

As announced on December 21, 2004, the government proposes that the OFTTC rate be increasedfrom 20 to 30 per cent for labour expenditures incurred after December 31, 2004 and before January 1,2010. In addition, the 10 per cent regional bonus would continue to be available for filming outside theGreater Toronto Area. First-time producers would be eligible for an enhanced rate of 40 per cent onthe first $240,000 of qualifying labour expenditures incurred after December 31, 2004 and beforeJanuary 1, 2010.

The Ontario Production Services Tax Credit (OPSTC) is a refundable tax credit for Ontario labourexpenditures incurred by foreign-based and domestic film and television productions that are notclaimed for purposes of the OFTTC.

As announced on December 21, 2004, the government proposes that the OPSTC rate be increasedfrom 11 to 18 per cent for labour expenditures incurred after December 31, 2004 and before April 1,2006. The three per cent regional bonus for filming outside the Greater Toronto Area would beeliminated for labour expenditures incurred after December 31, 2004.

Legislative amendments will be introduced to create regulatory authority to prescribe OFTTC andOPSTC rates.

Ontario Computer Animation and Special Effects Tax CreditThe Ontario Computer Animation and Special Effects (OCASE) Tax Credit is a 20 per cent refundabletax credit available to corporations for Ontario labour expenditures incurred in respect of digitalanimation and digital visual effects carried out in Ontario for use in film and television productions.

At present, the OCASE tax credit is based on the lesser of Ontario labour expenditures and 48 per centof the cost of the production net of certain government assistance.


The government proposes to enhance the OCASE tax credit. Effective for eligible expenditures afterMay 11, 2005, the OCASE tax credit would be based only on Ontario labour expenditures net ofcertain government assistance reasonably related to those expenditures.

Ontario Interactive Digital Media Tax CreditThe Ontario Interactive Digital Media Tax Credit (OIDMTC) is a 20 per cent refundable tax creditavailable to eligible corporations for qualifying expenditures incurred to create and market originalinteractive digital media products in Ontario.

This Budget proposes to improve accessibility to the OIDMTC. Effective for eligible productscompleted after May 11, 2005, the requirement that eligible corporations demonstrate a minimum 90per cent copyright ownership in the eligible product would be relaxed, provided that the product is notdeveloped under a fee-for-service arrangement.

Ontario Sound Recording Tax CreditThe Ontario Sound Recording Tax Credit (OSRTC) is a 20 per cent refundable tax credit available toeligible Ontario sound recording companies for qualifying expenditures in respect of an eligibleCanadian sound recording by an emerging Canadian artist or group.

This Budget proposes that the OSRTC be enhanced by the following measures for taxation yearsending after May 11, 2005:Ë the minimum period required by the corporation to carry on a sound recording business would be

reduced from 24 to 12 months; and

Ë for master tapes completed after May 11, 2005:

– the minimum total playing time would be reduced from 40 to 15 minutes; and– the requirement that a sound recording company market its copies of eligible sound recordings

through an established national distributor would be replaced with a requirement that a soundrecording company have a distribution plan approved by the Minister of Culture.

Ontario Book Publishing Tax CreditThe Ontario Book Publishing Tax Credit (OBPTC) is a 30 per cent refundable tax credit available toeligible Ontario book publishing companies for qualifying expenditures on literary works by newCanadian authors.

This Budget proposes to enhance the OBPTC for children’s books. Currently, an author is eligible forthe first three children’s books published. The proposed enhancement would allow a children’s bookauthor to be an eligible author for the first three works published in each category of children’swriting:

Ë fiction;Ë non-fiction;


Ë poetry; andË biography.

This change would be effective for literary works published after May 11, 2005.

Capital Cost AllowanceOntario proposes to parallel recently announced federal regulatory changes to align the capital costallowance (CCA) rates with the useful life of assets and to encourage investment in assets used togenerate efficient and renewable energy, subject to federal implementation.

Assets acquired before January 1, 2008 that are used to generate electricity from clean, alternative orrenewable sources will continue to be eligible for Ontario’s 100 per cent CCA rate.

Tax AvoidanceThe government is in the course of reviewing arrangements that are designed to avoid corporateincome taxes paid to Ontario.

For example, arrangements can be designed to take advantage of differences in provincial corporateincome tax rates. In the international context, there are comprehensive federal income tax measuresthat address arrangements driven by differences in national income tax rates. However, limitedmeasures exist at the provincial level.

Differences in provincial income tax rates create an incentive for Canadian corporations in a relatedgroup to situate intangible property (such as indebtedness and intellectual property) in provinces withlower tax rates, and for these corporations to carry out internal transactions (e.g., transfers of goodsand services within the group) on terms that reduce the overall level of provincial tax in the corporategroup. In certain cases, arrangements can have the effect of “exporting” tax losses from a low-taxprovince to a higher-tax province.

These and other types of arrangements can also reduce income taxes paid in other provinces. TheOntario Government will be discussing this issue with the other provinces and the federal government,with the objective of developing common rules to address aggressive interprovincial tax-planningarrangements.

Treatment of Corporations Incorporated Outside CanadaA corporation’s liability for Ontario tax is based in part on whether the corporation is incorporatedinside or outside Canada. The federal government and the other provinces apply a residency testinstead of basing liability for tax on the jurisdiction of incorporation.


To stop the avoidance of provincial tax that can result from this difference, it is proposed that Ontariocorporate tax liability now be determined with reference to whether the corporation is resident (ratherthan incorporated) inside or outside Canada. This change to the Ontario corporate tax rules would beconsistent with the federal corporate income tax rules and the rules in the other provinces.

This measure would be effective for taxation years ending after May 11, 2005.

RETAIL SALES TAX ACTRetail Sales Tax Exemption for Destination Marketing FeesIt is proposed that the temporary retail sales tax exemption for destination marketing fees be extended.Destination marketing fees billed on or before June 30, 2006 would qualify for exemption from thefive per cent retail sales tax on accommodations.

Eligibility rules would remain unchanged.

This measure continues support for an industry-sponsored tourism initiative.

Updating the Retail Sales Tax Exemptions for Publications Purchased by CharitableOrganizations and Educational InstitutionsIt is proposed that the retail sales tax exemption for publications produced or purchased by religious,charitable or benevolent organizations be updated to include CD-ROMs and DVDs used to promotethe objects of the organization.

It is also proposed that the exemption for publications purchased by schools, school boards,community colleges, universities and public libraries be updated to include educational DVDs.

These changes would be effective for purchases after May 11, 2005.

Retail Sales Tax Exemption for Booster SeatsThe Ontario Government’s Bill 73, An Act to Enhance the Safety of Children and Youth on Ontario’sRoads, was passed into law in December 2004.

Regulations under the new law would make booster seats mandatory for children who are too big forchild car seats, yet too small to be properly protected by seat-belts.

An amendment to the Retail Sales Tax Act will be proposed to expand the current retail sales taxexemption for child car seats to include booster seats. This amendment would be effective uponproclamation, to coincide with the implementation of the booster-seat requirement.


INITIATIVES TO ENCOURAGE THE REDEVELOPMENT OF BROWNFIELDSCrown liens have been identified by the National Round Table on the Environment and the Economy,municipalities, and others, as one of the barriers to the remediation of brownfields.

In the coming year, the Ministry of Finance will develop criteria for the removal of outstandingProvincial tax liens on brownfields properties. The Ministry will also work closely with the federalgovernment to co-ordinate the removal of outstanding federal liens. In addition, the Ministry ofFinance will undertake proposed amendments to the Municipal Act, 2001, to clarify programrequirements for the Brownfields Financial Tax Incentive Program.

TAX INCREMENT FINANCINGA number of municipalities have requested that the Province explore the feasibility of introducing TaxIncrement Financing (TIF) as a new financial tool. In response, in 2005-06, the government willexamine options to implement TIF as a tool to promote urban regeneration. In the summer and fall of2005, Ministry of Finance staff will consult with interested municipalities and others on the policyframework and potential legislation for this initiative.

TECHNICAL MEASURES Resource AllowanceThe resource allowance is a special deduction under the Corporations Tax Act provided tocorporations in the oil and gas and mining sectors. It is generally equal to 25 per cent of resourceprofits, and is provided instead of allowing deductibility of Crown royalties.

The 2004 Ontario Budget announced that the Province would maintain the Ontario resource allowanceand the rules restricting the deduction of Crown royalties, although these provisions are being phasedout by the federal government. The legislation implementing the Ontario announcement has beenpassed, and the required Ontario regulations are being finalized.

It is proposed that the Ontario provisions be amended to clarify that income computed for Ontariopurposes must be used in determining Ontario resource profits. This amendment, which would beeffective for taxation years beginning after May 6, 1997, would prevent corporations from obtaining adouble benefit as a result of claiming both an Ontario incentive deduction and additional resourceallowance on that incentive.

Streamlining of Current Remissions ProcessTax remissions under the Ministry of Revenue Act may be granted in special circumstances of publicinterest, and must be considered by cabinet, upon the recommendation of the Minister of Finance. It isproposed that an amendment be made to the Ministry of Revenue Act to streamline and increase theefficiency of the approval process for Ontario taxpayers. The amendment would provide the Ministerof Finance with the authority to remit amounts under $10,000, where such remissions would be in thepublic interest. This treatment would be consistent with that offered in several other provinces.


It is also proposed that the Minister of Finance invoke a provision under the Ontario Income Tax Actthat, if mutually agreed upon, would delegate to the Minister of National Revenue the ability to grantremissions of Ontario personal income tax in certain circumstances. This too would streamline theapproval process for Ontario taxpayers.

Retail Sales Tax Simplified Calculation for Small Software BusinessesRetail sales tax applies to non-custom computer software and certain software services. Whenproviding software services to customers, businesses must charge the applicable tax on the taxablecomponents. Contracts may often include a blend of both taxable and non-taxable services, requiringbusinesses to determine the tax liability of the components of the service contract.

To simplify the tax determination and collection for small software businesses, the Ministry of Financewill be proposing a pilot project consisting of an optional method of tax calculation for contractsinvolving both taxable and non-taxable services. Participating businesses and purchasers could opt touse a blended tax rate applied to the total contract price. This would benefit small software businessesby simplifying the tax determination and collection process.

Use of Appraisals for Multijurisdictional Vehicle TaxUnder the Retail Sales Tax Act, it is proposed that multijurisdictional vehicle owners be permitted touse appraisals to establish vehicle value when transferring their vehicles from multijurisdictional useto Ontario use. This would only apply to vehicles purchased after September 30, 2001, owned by thesame person for more than 60 months, and where the pro-rated multijurisdictional vehicle tax was paidin lieu of the point-of-sale retail sales tax.

PROFESSIONAL CORPORATIONSIn 2001, the right to incorporate was extended to all regulated professionals. Under existingprovisions, non-members of a profession cannot own shares in a professional corporation. Recentnegotiations with the Ontario Medical Association have resulted in the government’s commitment toextend the share structure of physician professional corporations to include non-voting shares forfamily members. The government is also proposing to implement this change for dentists who operatetheir practices through a professional corporation.


Technical AmendmentsIn order to improve the administrative effectiveness and enforcement, and maintain the integrity andequity of Ontario’s tax system, as well as enhance legislative clarity and regulatory flexibility topreserve policy intent, certain amendments will be proposed to the following statutes:

Ë Assessment Act

Ë Business Corporations Act

Ë Community Small Business Investment Funds Act

Ë Corporations Tax Act

Ë Electricity Act, 1998

Ë Employer Health Tax Act

Ë Fuel Tax Act

Ë Gasoline Tax Act

Ë Highway Traffic Act

Ë Income Tax Act

Ë Land Transfer Tax Act

Ë Ministry of Revenue Act

Ë Regulated Health Professions Act, 1991

Ë Retail Sales Tax Act

Ë Tobacco Tax Act

FINANCIAL ADMINISTRATION ACTThe government intends to introduce amendments to the Financial Administration Act that, if passed,would allow for the implementation by the government of Special Operating Agencies, revolvingaccounts and expanded use of recoveries. These amendments are designed to improve accountabilityand financial management of qualifying government programs and have been implementedsuccessfully in other Canadian jurisdictions.


2005 Budget Impact Summary* ($ Millions)2005-06 2006-07 2007-08 2008-09

Income Tax Act

Ontario Property and Sales Tax Credits for Seniors1 (2) (2) (2) (2)Concordance with the Income Tax Act (Canada) (24) (24) (25) (25)

Corporations Tax ActOntario Film and Television Tax Credit (31) (39) (48) (57)Ontario Production Services Tax Credit (17) 0 0 0Ontario Computer Animation and Special Effects Tax Credit (1) (1) (1) (1)Ontario Interactive Digital Media Tax Credit (1) (1) (2) (2)Ontario Sound Recording Tax Credit (1) (1) (2) (2)Ontario Book Publishing Tax Credit2 – – – –Capital Cost Allowance (4) (8) (14) (37)Closing Loophole: Ensuring Corporations Incorporated Outside

Canada Pay Provincial Tax35 5 5 5

Retail Sales Tax ActExemption for Destination Marketing Fees (2) (1) 0 0Updating Exemptions for Publications Purchased by Charitable

Organizations and Educational Institutions(1) (1) (1) (1)

Exemption for Booster Seats4 (1) – – –Technical Measures5 – – – –Professional Corporations (10) (40) (40) (40)Total Revenue Changes (88) (113) (129) (162)* Numbers may not add due to rounding.Notes:1 Estimate based on anticipated adjustment to the income threshold for senior couples.2 Ongoing cost estimated to be $100,000 per year.3 This figure does not include revenue that may be received in 2005-06 in respect of additional income allocated to Ontario as a result

of the difference between Ontario rules, and federal corporate income tax rules and the rules in other provinces.4 2006-07 and ongoing cost estimated to be $400,000 per year.5 $0 in 2005-06. Less than $1 million in subsequent years.


PAPER D Report on Borrowing and Debt Management


Paper D: Report on Borrowing and Debt Management 165

Long-Term Public Borrowing As an agency of the Ministry of Finance, theprimary goal of the Ontario FinancingAuthority (OFA) is to manage theborrowing, debt and cash managementactivities of the Province and the OntarioElectricity Financial Corporation (OEFC) ina professional and cost-effective manner.

In 2004-05, the OFA borrowed $24.8 billionon behalf of the Province and the OEFC.The $24.8 billion included $5.9 billion inpre-funding for the 2005-06 Long-TermPublic Borrowing Requirement, as the OFAdecided to take advantage of favourablemarket conditions to lock in the lowest long-term interest rates since the early 1960s. Without the pre-funding, the 2004-05 Long-Term Public Borrowing Requirement would have been $4.9 billion lowerthan the $23.8 billion forecast in the 2004 Budget Plan.

While the majority of borrowing was completed in the domestic market, Ontario further diversified itsfunding sources by raising the equivalent of $7.2 billion in the international capital markets, achievingcosts comparable to those available in the Canadian domestic markets. Highlights include:

Ë Four U.S. dollar Global bonds.

Ë Euro Medium-Term Notes (EMTNs) in Canadian and Australian dollars, Swiss francs as well asOntario’s first sterling-denominated issue since 1998.

In 2004-05, $16.6 billion, or 67 per cent, ofthe Total Long-Term Public BorrowingRequirement was completed in the Canadiandollar domestic market.

The Province used a variety of cost-effective financial instruments to diversifyits domestic borrowing program and meetinvestor preferences.

C$24.8 billion issued

BorrowingBorrowing——All MarketsAll Markets

Other $1.0 billion

Euro Medium-Term Notes$1.8 billion

Domestic Issues

$16.6 billion

Global/U.S.Issues

$5.4 billion

Source: Ontario Financing Authority (March 31, 2005).

C$16.6 billion issued

BorrowingBorrowing——Domestic MarketDomestic Market

Ontario Savings Bonds

$1.1 billion

Bond Auctions$1.6 billionFloating

Rate Notes$2.9 billion

Medium -Term Notes$3.2 billion

Syndicated Issues

$7.8 billion



2004-05 Borrowing Program: Province and OEFC

($ Billions)BudgetPlan* Interim

In-YearChange

Deficit/(Surplus) 6.1 3.0 (3.1)Adjustments for: Non-Cash Items Included in Deficit (0.7) (2.0) (1.3) Amortization of Major Tangible Capital Assets (0.8) (0.8) -Acquisitions of Major Tangible Capital Assets 1.6 1.5 (0.1)Debt Maturities 16.1 15.3 (0.8)Debt Redemptions 1.0 1.4 0.4Canada Pension Plan Borrowing (1.1) (1.0) 0.1Increase/(Decrease) in Cash and Cash Equivalents - 5.9 5.9Decrease/(Increase) in Short-Term Borrowing 0.2 0.2 -Other Uses/(Sources) of Cash 1.4 1.4 -Total Long-Term Public Borrowing Requirement 23.8 24.8 1.0Note: Numbers may not add due to rounding.*Deficit and Adjustments for Non-Cash Items Included in Deficit as per 2004-05 Budget Plan excluding the one-timerevenue gain related to the projected elimination of the liability for non-utility generator power purchase agreements in2004-05.

The Increase/(Decrease) in Cash and Cash Equivalents in 2004-05 represents $5.9 billion of pre-funding for the 2005-06 Total Long-Term Public Borrowing Requirement.

Details of the in-year improvement of $3.1 billion from the $6.1 billion deficit projected in the 2004Budget are included in Appendix 1 to Paper A, Details on Ontario Finances.

The $1.3 billion decline in Adjustments for Non-Cash Items Included in Deficit is primarilyattributable to the impact of the federal government transfer for Health Care Wait Times Reduction($1.4 billion).

The $0.8 billion decline in Debt Maturities is primarily attributable to debt that had callable orextendible features that were exercised or not exercised by either the investor or the Province,resulting in the extension of the corresponding debt maturities to future years. As part of prudentbudget forecasting, it was assumed that this debt would mature in fiscal 2004-05.


Medium-Term Borrowing Program Outlook: Province and OEFC($ Billions) 2005-06 2006-07 2007-08 2008-09Deficit/(Surplus) 2.8 2.4 1.5 -Adjustments for:

Non-Cash Items Included in Deficit 2.3 1.2 1.7 1.4Amortization of Major Tangible Capital Assets (0.8) (0.9) (1.0) (1.0)

Acquisitions of Major Tangible Capital Assets 1.8 2.2 2.4 2.2Debt Maturities

Currently Outstanding 20.5 14.5 12.6 19.1

Incremental Impact of Future Refinancing - - 1.9 2.5Subtotal 20.5 14.5 14.4 21.7

Debt Redemptions 0.7 0.7 0.7 0.7Canada Pension Plan Borrowing (1.2) (0.4) (0.4) (0.6)Decrease/(Increase) in Short-Term Borrowing - - - -Other Uses/(Sources) of Cash 1.1 0.1 0.2 0.5Total Long-Term Public Borrowing Requirement 27.2 19.9 19.5 24.8


2005-06 Borrowing Program Status*($ Billions) Completed Remaining TotalProvince 6.5 18.2 24.7OEFC - 2.5 2.5Total 6.5 20.7 27.2

*As of April 30, 2005.

As of April 30, 2005, $6.5 billion, or 24 per cent, of the 2005-06 Total Long-Term Public BorrowingRequirement had been completed. This consists of $5.9 billion in pre-funding undertaken during2004-05 and $0.6 billion of long-term debt issued in 2005-06.

The Canadian domestic market will remain the main funding source for the Province in 2005-06.Ontario will diversify its domestic borrowing program by issuing a variety of debt instrumentsincluding syndicated issues, bond auctions, floating rate notes, medium-term notes and OntarioSavings Bonds. The OFA is also reviewing the merits of issuing a Real Return Bond linked to theCanadian Consumer Price Index.


International markets will remain a significant component of Ontario’s borrowing program. While theU.S. dollar market is expected to be the most important international market for the Province, Ontariowill also consider opportunities to expand its presence in the euro market and increase issuance inSwiss francs, sterling and yen.

In addition, the OFA is completing documentation to permit the Province to issue debt in theAustralian dollar domestic market. New currency markets may present cost-effective borrowingopportunities for Ontario. These include the Mexican peso and Turkish lira markets. Foreign exchangeexposure to these currencies will be converted into Canadian dollars.

The government will seek the approval of the legislature for additional borrowing authority to meetprogram requirements.


Debt MaturitiesThe most significant component of theborrowing program is the refinancing ofDebt Maturities.

The Incremental Impact of FutureRefinancing represents the effect of futureborrowing on the debt maturity profile, asindicated in the Medium-Term BorrowingProgram Outlook.

Debt MaturitiesDebt Maturities

02468

10121416182022

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015-2019

2020-2024

2025-2029

2030-2034

2035-2039

2040-2044

(C$ Billions) Province OEFC Incremental Impact of Future Refinancing


Excludes Province of Ontario and OEFC short-term debt and other liabilities.Assumes issues with options will be retired at the earliest possible date.


DebtOntario’s Total Debt has increased since theearly 1990s from $41.9 billion as of March31, 1991 to an interim $156.6 billion as ofMarch 31, 2005. The increase in Total Debtin the year ended March 31, 2000 reflects theconsolidation of OEFC’s $19.4 billion instranded debt from the electricity sector tothe Province’s debt.

Net Debt represents the difference betweenthe total liabilities and total financial assetsof the Province. Interim Net Debt was$142.2 billion as of March 31, 2005. NetDebt is projected at $146.0 billion as ofMarch 31, 2006.

The Ontario Strategic Infrastructure Financing Authority’s (OSIFA) interim 2004-05 debt of$1.3 billion is included in the Province’s Total Debt, but not in the Province’s Net Debt, as OSIFA’sdebt is offset by net assets of $1.3 billion. OSIFA’s debt is not guaranteed by the Province. This debtis composed of Ontario Opportunity Bonds ($323 million), Infrastructure Renewal Bonds($650 million) and short-term commercial paper ($315 million). Additional details on OSIFA areprovided in Paper B, Achieving Our Potential: Progress Towards a New Generation of EconomicGrowth.

TOTAL DEBT COMPOSITIONTotal Debt of $156.6 billion is composed ofbonds and debentures issued in both theshort- and long-term public capital marketsand non-public debentures held by certainfederal and provincial public-sector pensionplans and government agencies.

As of March 31, 2005, public debt totalled$131.3 billion, primarily consisting of bondsissued in the domestic and internationallong-term public markets in nine currencies.Ontario also had $25.4 billion outstandingin non-public debt issued in Canadiandollars.

DebtDebt

0

20

40

60

80

100

120

140

160

180

1990-91

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-2000

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

Net DebtTotal Debt

($ Billions)

Sources: Ontario Public Accounts 1991-2004, Ontario Ministry of Finance, Ontario Financing Authority (March 31, 2005).

(interim) (projected)

C$156.6 billionTotal Debt CompositionTotal Debt Composition

Source: Ontario Financing Authority (March 31, 2005).Note: Numbers may not add due to rounding.

Debt issued outside of Canada in the following currencies:

• Canadian dollar• U.S. dollar• Euro• Japanese yen• Sterling• Swiss franc• Australian dollar• New Zealand dollar• Hong Kong dollar

U.S. Commercial Paper

$0.3 billionTreasury Bills

$3.7 billion

International Bonds

$42.7 billion

Domestic Bonds$84.6 billion

Non-Public Debt

$25.4 billion


DEBT MANAGEMENTThe Province mitigates financial risksassociated with its capital market activitiesby adhering to prudent risk managementpolicies and exposure limits.

The Province limits itself to a maximuminterest rate reset exposure of 25 per cent ofdebt issued for Provincial purposes and amaximum foreign exchange exposure offive per cent of debt issued for Provincialpurposes.

The Province’s interest rate reset andforeign exchange exposures were belowpolicy limits in 2004-05.

9.7

12.5

9.3 10.211.4

0

5

10

15

20

25

Mar 31 2001 Mar 31 2002 Mar 31 2003 Mar 31 2004 Mar 31 2005Interim

Interest Rate Reset ExposureInterest Rate Reset Exposure

Source: Ontario Financing Authority.

% of Debt Issued for Provincial Purposes

Excludes OEFC debt.

1.7 1.6 1.5

0.81.2

0

1

2

3

4

5

Mar 31 2001 Mar 31 2002 Mar 31 2003 Mar 31 2004 Mar 31 2005Interim

Foreign Exchange ExposureForeign Exchange Exposure

Source: Ontario Financing Authority.

% of Debt Issued for Provincial Purposes

Excludes OEFC debt.


LOWER AVERAGE COST OF DEBTThe Province has been able to take advantage of a lower interest rate environment by refinancing debtat more attractive interest rates.

As of March 31, 2005, the effective interestrate on Total Debt (on a weighted-averagebasis) was 6.3 per cent compared to 10.9 percent on March 31, 1991.

The effective interest rate on public debt asof March 31, 2005 was 5.6 per centcompared to 10.0 per cent on non-publicdebt. The weighted-average interest ratetakes into account the proportion of debt ateach level of interest rate in the debtportfolio.

Effective Interest Rate Effective Interest Rate (Weighted Average) of Debt(Weighted Average) of Debt

456789

1011121314

1990-91

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-2000

2000-01

2001-02

2002-03

2003-04

2004-05

Total Debt Public Debt Non-Public Debt

Effective Interest Rate (Weighted Average)

Sources: Ontario Public Accounts 1991-2004 and Ontario Financing Authority (March 31, 2005).(interim)


Consolidated Financial Tables

TABLE I (A): NET DEBT AND ACCUMULATED DEFICIT

TABLE I (B): DEBT MATURITY SCHEDULE

TABLE I (C): MEDIUM-TERM OUTLOOK—NET DEBT AND ACCUMULATEDDEFICIT

TABLE I (D): DERIVATIVE PORTFOLIO NOTIONAL VALUE


NET DEBT AND ACCUMULATED DEFICIT TABLE I (A)Interim 2005 ($ Millions)

2000-01 2001-02 2002-03 2003-04Interim2004-05

Plan2005-06

Debt(1)

Publicly Held Debt Debentures and Bonds(2) . . . . . . . . . . . . . 99,008 99,990 102,958 116,732 125,556 127,681 Treasury Bills . . . . . . . . . . . . . . . . . . . . . . 4,814 5,108 6,274 3,359 3,747 3,748 U.S. Commercial Paper(2) . . . . . . . . . . . . 959 1,566 1,515 1,156 269 269 Ontario Strategic Infrastructure

Financing Authority (OSIFA)(3) - - - 323 1,288 1,856 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 447 447 438 422 404 390 Deposits with the Province of Ontario Savings Office (POSO)(4) 2,482 2,438 - - - -

107,710 109,549 111,185 121,992 131,264 133,944Non-Public Debt Minister of Finance of Canada:

Canada Pension Plan Investment Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,709 11,944 10,746 10,233 10,233 10,233Ontario Teachers’ Pension Fund . . . . . . 11,535 11,043 10,387 9,487 8,666 7,596Public Service Pension Fund . . . . . . . . . 3,446 3,331 3,200 3,052 2,886 2,706Ontario Public Service Employees’ Union Pension Fund (OPSEU) . . . . . . . 1,637 1,582 1,520 1,450 1,371 1,285Canada Mortgage and Housing

Corporation . . . . . . . . . . . . . . . . . . . . . 1,147 1,116 1,078 1,047 1,003 960Other(5) . . . . . . . . . . . . . . . . . . . . . . . . . . 657 581 356 1,096 1,219 1,256

31,131 29,597 27,287 26,365 25,378 24,036Total Debt 138,841 139,146 138,472 148,357 156,642 157,980Cash and Temporary Investments . . . . . . (6,319) (5,773) (7,252) (8,139) (14,922) (7,900)Other Net (Assets)/Liabilities(6) . . . . . . . . . . (26) (1,252) 1,427 (1,348) 1,774 (2,250)OSIFA - Net (Assets)/Liabilities(3) - - - (313) (1,266) (1,813)Net Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . 132,496 132,121 132,647 138,557 142,228 146,017Tangible Capital Assets(7) . . . . . . . . . . . . . . - - (13,942) (14,369) (15,047) (16,040)Accumulated Deficit . . . . . . . . . . . . . . . . . 132,496 132,121 118,705 124,188 127,181 129,977

Source: Ontario Ministry of Finance.(1) Includes debt issued by the Province and Government Organizations, including Ontario Electricity Financial Corporation.(2) All balances are expressed in Canadian dollars. The balances above reflect the effect of related derivative contracts.(3) OSIFA's interim 2004-05 debt is composed of Ontario Opportunity Bonds ($323 million), Infrastructure Renewal Bonds ($650 million)

and short-term commercial paper ($315 million). OSIFA's debt is not guaranteed by the Province. OSIFA - Net (Assets)/Liabilities include cash, temporary investments, accounts receivable, loans receivable, debt issue costs andaccounts payable.

(4) The Province completed the sale of POSO to Desjardins Credit Union effective March 31, 2003, with the POSO liabilities to thedepositors assumed by the purchaser.

(5) Other non-public debt includes Ontario Municipal Employees Retirement Fund, College of Applied Arts and Technology Pension Plan,Ryerson Retirement Pension Plan, Ontario Immigrants Investor Corporation and indirect debt of school boards (the indirect debt ofschool boards was incurred in June 2003 to refinance the non-permanently financed debt of 55 school boards; an equivalent amountis included in Net Assets as advance payments to school boards).

(6) Other Net (Assets)/Liabilities include accounts receivable, loans receivable, advances and investments in government businessenterprises, accounts payable, accrued liabilities, pensions and the liability for power purchase agreements with non-utilitygenerators.

(7) Starting with fiscal year 2002-03, Tangible Capital Assets are capitalized and amortized over their estimated useful lives. In 2001-02and prior years, the costs of Tangible Capital Assets were recognized as expenditures.


DEBT MATURITY SCHEDULE TABLE I (B)Interim 2005 ($ Millions)

CurrencyCanadian

DollarU.S.

DollarJapanese

Yen Euro(1)Other

Currencies(2)

Interim 2004-05

Total2003-04

TotalFiscal Year PayableYear 1Year 2Year 3Year 4Year 5

16,33511,792

6,74814,711

7,905

7,0162,6115,4683,5631,717

676460320

-876

46--

7951,443

--

244207882

24,07314,86312,78019,27612,823

20,60919,48112,158

9,26818,981

1-5 years6-10 years11-15 years16-20 years21-25 years26-40 years(3)

57,49121,874

4,34410,15614,99315,491

20,3754,263

----

2,33235

----

2,2841,188

----

1,333483

----

83,81527,843

4,34410,15614,99315,491

80,49730,978

1,71810,23114,36810,565

Total(4) 124,349 24,638 2,367 3,472 1,816 156,642 148,357Debt Issuedfor ProvincialPurposes 100,693 19,935 2,367 3,472 1,369 127,836 120,481OEFC Debt 22,368 4,703 - - 447 27,518 27,553OSIFA Debt 1,288 - - - - 1,288 323Total(5) 124,349 24,638 2,367 3,472 1,816 156,642 148,357

(1) Euro includes debt issued in legacy currency, i.e., French franc.(2) Other Currencies comprise Australian dollar, New Zealand dollar, Pound sterling, Swiss franc and Hong Kong dollar.(3) The longest term to maturity is to March 1, 2045.(4) Total for all foreign currency denominated debt as at March 31, 2005 was $32.3 billion (2004, $30.3 billion).

Of that, $31.2 billion or 96.6% (2004, $27.5 billion or 90.8%) was fully hedged to Canadian dollars.(5) Total debt includes issues totalling $3.0 billion (2004, $2.9 billion) that have embedded options exercisable by either the Province or

the bondholder under specific conditions.

MEDIUM-TERM OUTLOOK TABLE I (C)NET DEBT AND ACCUMULATED DEFICIT ($ Billions)

2006-07 2007-08 2008-09Total Debt 163.5 168.7 172.0Cash and Temporary Investments (7.9) (7.9) (7.9)Other Net (Assets)/Liabilities (3.2) (4.3) (5.2)OSIFA - Net (Assets)/Liabilities (2.7) (3.9) (5.1)Net Debt 149.7 152.6 153.8Tangible Capital Assets (17.4) (18.8) (20.0)Accumulated Deficit 132.4 133.9 133.9



DESCRIPTION OF DERIVATIVE FINANCIAL INSTRUMENTS

The table below presents an interim maturity schedule of the Province’s and OEFC’s derivative financial instruments, by type, basedon the notional amounts of the contracts. Notional amounts represent the volume of outstanding derivative contracts, are notindicative of credit or market risk, and are not representative of actual cash flows.

Derivatives are financial contracts, the value of which is derived from underlying instruments. The Province uses derivatives to hedgeand to minimize interest costs. Hedges are created primarily through swaps, which are legal arrangements under which the Provinceagrees with another party to exchange cash flows based upon one or more notional amounts using stipulated reference interestrates for a specified period. Swaps allow the Province to offset its existing obligations and thereby effectively convert them intoobligations with more desirable characteristics. Other derivative instruments used by the Province include forward foreign exchangecontracts, forward rate agreements, futures, options, caps and floors.

The Province also limits its credit risk exposure on derivatives by entering into contractual agreements (master agreements) thatprovide for termination netting and, if applicable, payment netting with virtually all of its counterparties.

DERIVATIVE PORTFOLIO NOTIONAL VALUE TABLE I (D)Interim 2005 ($ Millions)

Maturity in Fiscal Year 2005-06 2006-07 2007-08 2008-09 2009-106-10

Years

Over 10

Years

Interim2004-05

Total2003-04

TotalSwaps:

Interest rate . . . . . . . . .Cross currency . . . . . . .

Forward foreignexchange contracts . . .

Futures . . . . . . . . . . . . . . .Options . . . . . . . . . . . . . .Caps and floors . . . . . . . .

13,5678,903

5,24162

-275

7,7104,625

---

398

10,7474,469

----

11,2054,635

----

7,8544,482

---

88

15,1273,833

----

3,781-

----

69,99130,947

5,24162

-761

55,01330,622

2,7556290

480TOTAL 28,048 12,733 15,216 15,840 12,424 18,960 3,781 107,002 89,022


GLOSSARY OF FINANCIAL INSTRUMENTS DESCRIBED IN PAPER D

Bond Auction: process in which participants are invited to bid on an amount of a bond on a semi-annual yield basis.

Cap: a contract that allows the purchaser to put a ceiling on the contractual interest rate of a liability.

Domestic Bonds: debt securities issued in the domestic market, clearing through a domestic clearing system.

Euro Medium-Term Notes (EMTNs): medium-term notes issued outside the United States and Canada and structured tomeet individual investor requirements.

Floating Rate Notes (FRNs): debt instruments that bear a variable rate of interest. Coupons are linked to a floating interestrate index, and pay out at a predetermined yield spread to the index.

Floor: a contract that allows the purchaser to have a lower limit on the total rate of return of an asset.

Forward Foreign Exchange Contract: an agreement between two parties to set exchange rates in advance.

Future: an exchange-traded contract that confers an obligation to buy/sell a commodity at a specified price and amount on afuture date.

Global Bonds: debt securities issued simultaneously in the international and domestic markets, settling through variousworldwide clearing systems. These can be issued in a variety of currencies including Canadian and U.S. dollars.

Medium-Term Notes (MTNs): debt instruments offered under a registered program and structured to meet specific investorneeds.

Notional Value: represents the face value of outstanding contracts. It does not represent cash flows.

Option: a contract whereby the buyer has the right to buy/sell a designated instrument at a specified price within a specifiedperiod of time.

Swap: a legal arrangement, the effect of which is that each of the parties (the counterparty) takes responsibility for a financialobligation incurred by the other counterparty. An interest rate swap exchanges floating interest payments for fixed interestpayments or vice versa. A cross-currency swap exchanges principal and interest payments in one currency for cash flows inanother currency.

Syndicated Issues: debt securities that are underwritten by a group of investment dealers.

Treasury Bills: short-term debt instruments issued by governments on a discount basis usually for durations of 91 days, 182days, or 52 weeks.

U.S. Commercial Paper (CP): short-term debt typically issued by a government or corporation on a discount basis. CP islimited to terms of 1 to 270 days and is usually supported by a back-up bank line of credit.
